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57–544 PDF 2010

S. HRG. 111–552 

SENIORS FEELING THE SQUEEZE: RISING DRUG 

PRICES AND THE PART D PROGRAM 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

WASHINGTON, DC 

MARCH 17, 2010 

Serial No. 111–15 

Printed for the use of the Special Committee on Aging 

( 

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

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

BILL NELSON, Florida 

ROBERT P. CASEY, Jr., Pennsylvania 

CLAIRE McCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

MARK UDALL, Colorado 

KIRSTEN GILLIBRAND, New York 

MICHAEL BENNET, Colorado 

ARLEN SPECTER, Pennsylvania 

AL FRANKEN, Minnesota 

BOB CORKER, Tennessee 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

GEORGE LeMIEUX, FLORIDA 

ORRIN HATCH, Utah 

SAM BROWNBACK, Kansas 

LINDSEY GRAHAM, South Carolina 

SAXBY CHAMBLISS, Georgia 

DEBRA WHITMAN, Majority Staff Director 

MICHAEL BASSETT, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

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

Opening Statement of Senator Bill Nelson ........................................................... 3 

Opening Statement of Senator Bob Corker ........................................................... 9 

PANEL OF WITNESSES

Statement of Gerard Anderson, M.D., Director, Center for Hospital Finance 

and Management, Johns Hopkins Bloomberg School of Public Health, Baltimore, MD .............................................................................................................. 12 

Statement of John Dicken, Director, Healthcare, Government Accountability 

Office, Washington, DC ....................................................................................... 41 

Statement of Gregory Hamilton, MBA, Consultant, Algonquin, IL .................... 61 

Statement of Willafay McKenna, Medicare Part D Participant, Williamsburg, 

VA .......................................................................................................................... 65

Statement of Jack Calfee, Ph.D., Resident Scholar, The American Enterprise 

Institute, Washington, DC .................................................................................. 72 

APPENDIX 

Statement of Senator Al Franken .......................................................................... 97 

Mr. Anderson’s Responses to Senator McCaskill’s Questions .............................. 100 

Mr. Anderson’s Responses to Senator Franken’s Questions ................................ 100 

Mr. Dicken’s Responses to Senator McCaskill’s Questions .................................. 101 

Mr. Dicken’s Responses to Senator Franken’s Questions .................................... 102 

Mr. Hamilton’s Responses to Senator McCaskill’s Questions .............................. 104 

Mr. Hamilton’s Responses to Senator Franken’s Questions ................................ 104 

Mr. Calfee’s Responses to Senator McCaskill’s Questions ................................... 105 

Mr. Calfee’s Responses to Senator Franken’s Questions ...................................... 106 

Statement submitted by Medicare Rights Center President Joe Baker ............. 108 

Statement submitted by Medicare Access for Patients Rx (MAPRx) .................. 111 

Statement submitted by Curt D. Gurberg, MD, PhD, Advance, NC ................... 115 

(III) 

(1) 

SENIORS FEELING THE SQUEEZE: RISING 

DRUG PRICES AND THE PART D PROGRAM 

WEDNESDAY, MARCH 17, 2010 

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

The Committee met, pursuant to notice, at 2:49 p.m. in room 

SD–562, Dirksen Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. 

Present: Senators Kohl, Nelson, McCaskill, Corker, and LeMieux. 

OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN 

The CHAIRMAN. Good afternoon to one and all, and we thank the 

witnesses who are with us today. 

We are pleased to have Senator Bill Nelson chair today’s hearing 

on the effect of high drug prices on America’s seniors and the Medicare Part D program. 

Senator Nelson is a most valuable member of this committee, 

who hails from a State that understands very well the unique challenges and opportunities posed by an aging population. He has 

been a leader on this issue, and we are very happy to have him 

leading the charge for the Aging Committee. 

Before I turn over the gavel to Senator Nelson, I want to make 

sure we all understand that prices for brand-name drugs are higher in this country than anywhere else in the world. This affects 

seniors severely, both because they tend to need more medications 

and because of the doughnut hole in Medicare Part D, which can 

cost individuals up to $4,400 out-of-pocket every year. 

But ultimately, the high price of drugs does affect each and every 

one of us. Americans pay as much as two to three times as much 

for the same medications as people in other industrialized countries. This is one of the reasons healthcare costs so much more in 

this country. 

I have written letters to the top six drug makers to find out why. 

Why must American consumers pay so much more, when the bulk 

of drug research and innovation happens right here in the United 

States, and much of it is subsidized by our Federal Government? 

The Aging Committee looks forward to taking a look at the answers to these questions later on this spring. 

In the meantime, today’s hearing is getting at an ongoing issue 

that is crucial to our seniors. I would like again to thank Senator 

Nelson for all his work on closing the doughnut hole and will now 

turn over the gavel and the remainder of the hearing to Senator 

Bill Nelson from Florida. 

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[The prepared statement of Senator Kohl] 


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OPENING STATEMENT OF SENATOR BILL NELSON 

Senator NELSON. Thank you, Mr. Chairman. 

Late last year, the AARP released a report that showed that 

while the Nation was in a recession and the overall inflation rate 

was negative, brand-name drugs were seeing some of their highest 

price increases in years. According to the report, the price of brandname drugs most commonly used by Medicare beneficiaries increased 9.3 percent in 2009, a much higher increase than any of 

the previous 7 years. 

For some drugs, their price increase was markedly higher. 

Aricept, a drug that treats dementia, saw a 17 percent increase. 

Ambien, a sleep aid, 19 percent increase. The price of Flomax, a 

drug used by men with enlarged prostates, increased 20 percent. 

Just yesterday, the Kaiser Family Foundation released a report 

confirming these trends. According to their report, 9 of the top 10 

drugs in Medicare Part D saw an increase between 2009 and 2010, 

and for half of those drugs, the increase was 5 percent or more. 

Kaiser also highlights some particularly egregious cases. Between 2006 and 2010, for Medicare Part D beneficiaries in the socalled doughnut hole, they paid 20 percent to 25 percent more for 

Lipitor, Plavix, Nexium, Lexapro, and paid 39 percent or more for 

Actonel, and paid 41 percent more for Aricept. 

In comparison, the Consumer Price Index, which is the general 

price increase of consumer goods, increased by 9 percent between 

2006 and 2010. Even the price of most medical care, which we call 

the health inflation—and of course, we know that that is increasing 

rapidly—well, that grew by 16 percent. So you can see the comparisons. 

Now these reports show us that a time when people’s pocketbooks are getting squeezed, seniors are being asked to pay more 

and more for their prescription drugs. So, in this hearing, which 

you have given me, Mr. Chairman, the graciousness of planning 

the hearing and chairing it—and I thank you. In this hearing, I 

hope that our witnesses are going to be able to help us look at 

these drug price increases, try to understand what is happening, 

and consider how they affect seniors in Medicare prescription drug 

Part D plans, and then discuss policy options for addressing these 

high and increasing costs. 

In order to understand how increasing drug prices affect seniors, 

it is important to understand the standard Part D prescription 

drug plan and how it works. Now a standard Part D plan in 2010— 

can you hold that up a little higher—starts with a $310 deductible, 

which the senior pays right at the outset. This then is followed up 

to an amount of total cost of drugs of $2,830 in total spending, 

where the senior pays an average of 25 percent, and the prescription drug Part D plan pays 75 percent up to that level. 

All right. Then this is known as the doughnut hole. Because 

under what was passed back in 2003 in order to establish a new 

prescription drug plan and for it not to cost the Federal Government more than a certain amount, someone devised this crazy plan 

that then has the doughnut hole all the way up to $6,440 in total 

drug costs that the senior citizen is paying 100 percent of that hole, 

known as the doughnut. 

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I suppose they call it a doughnut, although it is not closed on all 

sides, because you have got some coverage down here on this side 

of the doughnut and then up there on the doughnut. That is what 

is basically the catastrophic coverage, of which the senior citizen 

pays 5 percent, the prescription drug Part D plan pays 15 percent, 

and Medicare pays 80 percent. Now that is the doughnut, and that 

is the hole. 

So, you can see on out-of-pocket costs, the senior is paying $310 

right off the bat on the bottom. By the time they get to where they 

are paying 100 percent of the drug cost in the doughnut hole, they 

have expended $940 out-of-pocket costs. By the time they got 

through the doughnut hole, they are now out of pocket $4,550 outof-pocket costs. 

Over in the House, Congressman Pete Stark requested a report 

from the Government Accountability Office on the prescription 

drug program drug price increases, and we are going to discuss 

that today. This report gives us an example of a cancer drug called 

Gleevec, and the price was increased by 46 percent between 2006 

and 2009, from about $31,200 per year to about $45,500 per year. 

Average out-of-pocket cost for this drug per year increased for a 

senior citizen of $4,900 back in 2006 to more than $6,300 in 2009. 

That, over 3 years, is not a trivial amount of increase. 

If drug prices were increasing for some underlying necessary reason, such as scarcity of resources or excessive increase in demand, 

then we would be able to understand the increases a lot better. But 

these very same drugs are sold all over the world, and they are 

sold for far less than they cost here in the United States. 

The 30 most commonly prescribed drugs cost 27 percent less in 

Canada and 66 percent less in New Zealand, the 30 most commonly prescribed drugs. The drugs are approximately 50 percent 

less in the United Kingdom, the Netherlands, and France. 

So, while pharmaceutical companies are giving other countries 

deep discounts, they are still able to maintain a tidy profit due to 

their high prices in the U.S. Let us go to Chart 3. Between 2006 

and 2009, the profits of the top drug makers grew by up to 201 percent. Between 2006 and 2009, the top drug makers, and there they 

are listed, and here their profits grew over that period of time, 

starting at 96 percent here up to 201 percent. 

Now health reform legislation provided unprecedented opportunity to control prescription drug prices, and the House of Representatives is going to get a chance to vote on what we provided 

in the Senate. What came out in the Senate-passed bill was something that was agreed to early on between the White House and 

some of the leadership in the Congress and the drug companies. In 

the Senate-passed bill, the doughnut hole is not eliminated. 

Let us go back to that chart with the doughnut hole. Instead, the 

brand-name drug manufacturers are mandated to give seniors a 50 

percent discount on drugs when they are in the doughnut hole. Remember, the senior pays 100 percent here. In the Senate-passed 

bill, if you thought the doughnut hole was closed, it wasn’t. 

The drug companies will give a 50 percent discount for the 

brand-name drugs to seniors. It doesn’t say what the price is. It 

says that they will give a 50 percent discount to the seniors. 

5 

Now there is talk, and it is supposed to be published on the 

Internet tonight, this additional proposal, and we will see once it 

gets up on the Internet, for a bill that would come to the Senate 

from the House next week, after the Senate bill is signed into law. 

That is that the Federal Government kicks in an additional 25 percent to expand the discount to 75 percent for brand-name drugs, 

as well as a 75 percent discount on generics. It is not the drug companies that are kicking in the additional 25 percent for the doughnut hole. It is the Federal Government. 

Proponents of the plan argue that this achieves full coverage 

since seniors are paying 25 percent co-insurance, but when the 

drug manufacturers are required to give a discount, what happens? 

Do they raise their prices? By basing this doughnut hole policy on 

a discount, beneficiaries and the Federal Government are still 

going to be subject to working off the base price of whatever the 

pharmaceutical company has established as the price of the brandname drug. 

So, is this policy going to prevent manufacturers from raising 

their prices? Well, I certainly would encourage them to do so, but 

there is no guarantee. 

Now, since this whole thing was created back in 2003, and the 

prescription drug benefit, been a lot of folks talking about eliminating the doughnut hole. While this proposal that is coming back 

to the Senate next week is not going to stop manufacturers from 

raising their prices, it will provide additional protection to seniors 

that would otherwise experience having to pay the whole freight in 

the doughnut hole. 

Why do I get exercised about this? Because back in the Finance 

Committee, I offered an amendment that was not accepted on a 10 

to 13 vote, 13 votes against and 10 for, that would have caused 

there to be a rebate for only dual eligibles, those people who were 

eligible for Medicaid because either they were poor or disabled, and 

they were eligible also dually because they were of Medicare age. 

Back in the old days before the prescription drug benefit, the 

dual eligibles got the same rebate that is in law from drug manufacturers for Medicaid recipients because they qualified for Medicaid, even though they were of retirement age for Medicare. Uhuh, not after the 2003 prescription drug benefit. If you went and 

got your drugs through Medicare in the new plan, prescription 

drug benefit D, you didn’t get a rebate to the Federal Government. 

You had to go through this scheme. 

So, today, taxpayers pay higher cost for the same drugs for the 

same seniors that they used not to do before the prescription drug 

benefit. So, we want our panel to discuss all of this. We want you 

to tell us your personal experiences. 

I am sorry to have taken as long as I have, but we needed to get 

into the technicalities on this to set the table for this discussion. 

We have a distinguished panel. 

Dr. Gerard Anderson is an expert on healthcare payment policy. 

He is currently a Professor of Johns Hopkins. Dr. Anderson also directs Johns Hopkins Center for Hospital Finance and Management. 

He co-directs the Program for Medical Technology and Practice Assessment, and previously, he was the National Program Director 

6 

for the Robert Wood Foundation-sponsored program Partnership 

for Solutions. I could go on and on. 

I will finish introducing the panel, and then I am going to turn 

to you, Senator Corker, as the ranking member? Let me finish introducing the panel. 

John Dicken is the Director for healthcare issues at the U.S. 

Government Accountability Office, where he directs evaluations of 

private health insurance, long-term care quality and financing, and 

prescription drug pricing issues. Prior to working at the GAO, Mr. 

Dicken was a Senior Analyst for the Presidential Advisory Commission on Consumer Protection and Quality in the Healthcare Industry. I could go on and on with his lengthy resume. 

Greg Hamilton has worked in the pharmaceutical industry for 31 

years. Mr. Hamilton’s areas of expertise include product reimbursement, as well as pharmaceutical issues in Medicaid and Medicare. 

Mr. Hamilton worked for major drug manufacturers as a pharmaceutical, nutritional, and biological account executive for 20 years. 

He has experience in marketing, sales, business development, and 

Government contracting. He was a Senior Product Manager for 

Bayer, and I could go on and on with his resume. 

Ms. Willafay McKenna is a Medicare beneficiary all too familiar 

with the challenges of what we have been talking about. Ms. 

McKenna has diabetes, and she controls that with insulin. Every 

year, her insulin costs push her into the Medicare Part D doughnut 

hole that we described where she has to pay 100 percent of those 

medications out of her pocket. She is from Williamsburg, VA. 

Finally, John Calfee, listed here as Jack Calfee. He is a resident 

scholar and Economist at American Enterprise Institute, where he 

studies the pharmaceutical industry and the Food and Drug Administration, along with the economics of tobacco tort liability and 

patents. He was previously a visiting senior fellow at Brookings, 

previously worked at the Federal Trade Commission’s Bureau of 

Economics. He has taught marketing and consumer business behavior at a number of schools and has a very lengthy resume. 

So, Mr. Chairman, with those introductions, if you want me to 

chair the meeting or throw it back to you, I would like to call on 

Senator Corker for his opening comments. 

[The prepared statement of Senator Nelson follows:] 

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OPENING STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Thank you, Mr. Chairman. 

I typically don’t give opening comments. However, our staff had 

written such an outstanding one, I was going to give one today. I 

am not going to do that because of the time. I respect the witnesses 

too much and want to hear from them. 

I know we have a vote at 3:30 p.m. So let me just say, though, 

I, too, have been concerned about the cost of brand drugs. We met 

with the Obama administration’s trade representative just recently 

to see if there are ways of getting at the fact that Americans pay 

so much more for brand name drugs than other folks. With that, 

I will stop. 

I look forward to hearing the testimony, Mr. Chairman. Thank 

you for calling this. 

[The prepared statement of Senator Corker follows:] 

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Senator NELSON. OK. All of the witnesses have been briefed 

ahead of time. We want to really dig into some questions. So we 

have asked each of you to keep your comments to 5 minutes. That 

will take some time, and I would encourage you to talk to us instead of reading a statement. 

Of course, your full statement will be entered as a part of the 

record, and we will start just in the order that I introduced you. 

So, Dr. Anderson? 

STATEMENT OF GERARD ANDERSON, M.D., DIRECTOR, CENTER FOR HOSPITAL FINANCE AND MANAGEMENT, JOHNS 

HOPKINS BLOOMBERG SCHOOL OF PUBLIC HEALTH, BALTIMORE, MD 

Dr. ANDERSON. Thank you, Mr. Chairman and members of the 

committee—— 

Senator NELSON. Make sure your microphone is on. 

Dr. ANDERSON. OK. The rising prices of prescription drugs, especially brand-name drugs, is an important issue for America’s seniors and for the Medicare program. Let me begin by following up 

with Senator Kohl and Senator Nelson on the price, the international perspective. 

In 2007, the prices for brand-name drugs in the United States 

were about double the prices in other industrialized countries. For 

example, the average price of one dose of Lipitor in the United 

States was $2.82. The U.S. was paying 54 percent more than Canada, more than twice as much as most other industrialized countries, and four times the price for Lipitor in New Zealand. 

The story, however, is quite different for generic drugs. Most 

other countries pay two to three times what we pay for generic 

drugs. Countries have devised a whole variety of different ways to 

try to control drug prices, and some of them seem to be much more 

effective price negotiators than other countries. The U.S. seems to 

be not very good at brand-name drugs and very good on generic 

drugs. 

These price differentials have very important public policy implications. In 2006, I coauthored an article, which said if the United 

States was paying the same prices as these other countries, we 

could completely eliminate the doughnut hole. 

Ms. McKenna, who you are going to hear from in a moment, is 

typical of the about 4 million Medicare beneficiaries that enter the 

doughnut hole each and every year. The Kaiser Family Foundation, 

looking at this data, found that once people entered the doughnut 

hole, about 10 percent of the diabetics stopped taking their medications and about 18 percent of people with osteoporosis stopped taking their medications. 

In 2008, I coauthored an article in JAMA discussing how Medicare beneficiaries could respond to the financial incentives created 

by the doughnut hole. We did not recommend that they stop taking 

their medications. Changing medications or eliminating medications for financial reasons can lead to very severe adverse outcomes, higher emergency rooms, more preventable hospitalizations, 

a whole series of things. 

Between 2007 and 2017, the size of the doughnut hole is projected to double, exposing more beneficiaries to even higher out-ofVerDate Nov 24 2008 12:07 Jul 28, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 H:\DOCS\57544.TXT SAG PsN: JOYCE
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pocket expenditures and increasing the costs of cost-related noncompliance. It is now virtually impossible to get insurance coverage 

that fills in the doughnut hole. 

There is basically two categories of drugs, brands and generics. 

On average, brand-name drugs are about four times as expensive 

as generic drugs. Brand-name drugs are the ones that are most 

likely to push people into the doughnut hole. Beneficiaries who 

enter the doughnut hole are the ones who are most likely to be 

using these brand-name drugs. 

According to the—and it was already talked about, according to 

a report by AARP, overall drug prices increased about 9 percent in 

2008 and 2009. What this means is that about 300,000 Medicare 

beneficiaries are added to the doughnut hole each time drug prices 

go up by about 9 percent. 

According to the GAO, the prices for the most expensive brandname drugs increased an average of 12 percent between 2006 and 

2009. MedPAC has found that Part D plans were unable to negotiate significant drug prices with drug companies for brand-name 

drugs. GAO found pretty much the same thing for specialty drugs. 

One reason the drug companies argue that they need more 

money is to do more research and development. But what you have 

got to recognize is they only spend about 15 percent of their resources on research and development. They spend 30 percent on 

marketing. 

The 50 percent deal, or now maybe 75 percent deal, is to get the 

prices down. If beneficiaries enter the doughnut hole and they can 

leave, they will have a benefit. They will probably save about $522 

under this. Over the course of the 10 years, that is a savings of 

about $17 billion, but not the $80 billion promised. 

If, however, you enter the doughnut hole, it is very important 

that you get full credit for all the expenditures, not the 25 percent 

that you pay. Otherwise, you are going to remain in the doughnut 

hole forever. 

So what are the implications of rising drug prices for Medicare 

beneficiaries? Between 2006 and 2010, their premiums increased 

10 percent per year. The beneficiaries that used brand-name drugs 

are the ones most likely to enter the doughnut hole quickly and to 

stay in the doughnut hole. 

What are the implications for the Medicare program? Between 

2006 and 2009, the cost of reinsurance—that is what happens 

when you enter the doughnut hole and where the Medicare program pays 80 percent of the bill—increased an average of 22 percent per year. For low-income beneficiaries, the Medicare program 

pays almost all of the bill, and therefore, all of the costs for brandname drugs basically is paid for by the Medicare program. 

Thank you for your time. 

[The prepared statement of Dr. Anderson follows:] 

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Senator NELSON. Thank you, Dr. Anderson. 

Mr. Dicken. 

STATEMENT OF JOHN DICKEN, DIRECTOR, HEALTHCARE, 

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Mr. DICKEN. Mr. Chairman and members of the committee, I am 

pleased to be here today to provide highlights from GAO’s recent 

report entitled, ‘‘Medicare Part D: Spending, Beneficiary Cost-Sharing, and Cost Containment Efforts for High-Cost Drugs Eligible for 

a Specialty Tier.’’ 

This report focuses on drugs covered by Medicare Part D that 

have particularly high costs, sometimes exceeding tens of thousands of dollars per year, and how beneficiaries who take these 

drugs often face high out-of-pocket costs. 

Part D plans can assign covered drugs to special distinct tiers 

with different levels of cost-sharing, such as separate tiers for generic and brand-name drugs. CMS also allows Part D plans to establish a specialty tier when the total cost for a drug exceeds a certain threshold, set at $600 per month for 2010. 

Drugs eligible to be placed on specialty tiers are among the most 

expensive drugs on the market and are used by a small proportion 

of Medicare beneficiaries. Examples include immunosuppressant 

drugs, such as CellCept for transplant recipients; those used to 

treat cancer, such as Gleevec for leukemia; and antiviral drugs, 

such as Truvada for HIV. We found that specialty tier eligible 

drugs account for $5.6 billion, or about 10 percent of Medicare Part 

D spending in 2007. 

Medicare beneficiaries who received a low-income subsidy account for about 70 percent of this total spending. This is noteworthy because the cost-sharing for these beneficiaries is largely 

paid by Medicare. 

While most of the spending for these drugs was for beneficiaries 

who received a low-income subsidy, most Medicare beneficiaries are 

responsible for paying the full cost-sharing amounts required by 

their plans. Given the high costs, most Medicare beneficiaries taking a specialty tier eligible drug are likely to reach the catastrophic 

coverage threshold by spending at least $4,550 in out-of-pocket 

costs in 2010. 

Over half of all beneficiaries who used at least one specialty tier 

eligible drug reached the catastrophic coverage threshold in 2007, 

compared to only 8 percent of Part D beneficiaries who filed claims 

but did not use any specialty tier eligible drugs. 

Let me walk through an example of a beneficiary’s expected outof-pocket cost for a specialty tier eligible drug costing $1,100 per 

month, the median cost in 2007 for these drugs. Initially, out-ofpocket costs are likely to vary because some Part D plans may 

place the drug on a tier with a flat copayment while other plans 

may require co-insurance. 

In this example, excluding any deductibles, out-of-pocket costs 

during this initial coverage period could range from a flat $25 

monthly copayment to $363 per month for a plan with a 33 percent 

co-insurance. Under either cost-sharing approach, within 3 months, 

the beneficiary will typically reach the 2010 coverage gap threshold 

of $2,830 in total drug costs and be responsible for paying 100 perVerDate Nov 24 2008 12:07 Jul 28, 2010 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 H:\DOCS\57544.TXT SAG PsN: JOYCE
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cent of the drug’s costs. This is commonly referred to as the doughnut hole. 

Once out-of-pocket costs reach $4,550 in 2010, in about 6 months 

for this example, most beneficiaries will pay 5 percent of the drug’s 

negotiated price for the remainder of the calendar year. At this 

point, beneficiaries’ out-of-pocket costs will be similar, regardless of 

the plan’s initial requirement for a flat copayment or for co-insurance. 

Variations in negotiated prices between drugs across plans for 

the same drug and from year-to-year can also affect out-of-pocket 

costs for beneficiaries. As Senator Nelson noted, for example, for 

seven plans we reviewed, the average negotiated price for the cancer drug Gleevec increased by 46 percent from about $31,000 in 

2006 to more than $45,000 in 2009. 

Correspondingly, the average out-of-pocket cost for a beneficiary 

taking Gleevec for the entire year will have risen from about 

$4,900 in 2006 to more than $6,300 in 2009. 

Finally, let me close by noting that Part D plan sponsors report 

having little leverage to negotiate price concessions, such as rebates from manufacturers, for most specialty tier eligible drugs. All 

7 of the plan sponsors we surveyed reported they were unable to 

obtain price concessions from manufacturers on 8 of the 20 drugs 

in our sample. 

For most of the other 12 drugs, plan sponsors report that they 

were able to obtain price concessions that averaged 10 percent or 

less. Reasons plan officials cited for limited leverage include the 

lack of market competitors, CMS formulary requirements, and very 

low utilization. 

Mr. Chairman, this concludes my statement. I would be happy 

to answer any questions that you or other members may have. 

[The prepared statement of Mr. Dicken follows:] 

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Senator NELSON. Thank you, Mr. Dicken. 

Mr. Hamilton. 

STATEMENT OF GREGORY HAMILTON, MBA, CONSULTANT, 

ALGONQUIN, IL 

Mr. HAMILTON. I remembered to turn my mike on. 

Mr. Chairman and members of the Aging Committee, thank you 

for inviting me here this afternoon. My name is Greg Hamilton, 

and I am a consultant in the healthcare industry in which I have 

been working for over 35 years. 

Most of my clients are Qui Tam attorneys working with whistleblowers, the DOJ, and States to recover monies lost through fraud. 

I have been asked here today to discuss with you the effect on seniors of the 2008 and 2009 drug price increases, which you have described quite well. 

A couple quick points, the Wall Street Journal article on April 

15 quoted one of my former employers, Express Scripts, saying it 

saw prices rise more than 10 to 15 percent over the past 12 

months. The New York Times reported that wholesale prices for 

brand-name drugs rose about 9 percent last year, and this was all 

in the face of, as you noted, the Consumer Price Index decrease by 

1.3 percent. 

Analysts in these articles believe these unusual increases were 

preemptive attacks on anticipated cost containment under 

healthcare reform, coupled with a drive to maintain profits as patents on many popular brand drugs are set to expire soon. 

These price increases will harm seniors—seniors in Part D, seniors in retirement plans, seniors paying cash. Pretty much anybody 

that goes to buy a prescription is going to be affected by these price 

increases. Here is why. It all has to do with the system in which 

they get paid. 

Pharmacies are not paid by the insurance companies. Almost all 

pharmacy claims are paid by a middleman called a pharmacy benefit manager, or PBM, as in one of my former employers. Insurance 

companies, unions, and other payers hire PBMs to maintain networks of retail pharmacies, create formularies, configure copay 

tiers, collect rebates, and adjudicate claims. 

PBMs begin this process by contracting with retail pharmacies. 

They negotiate reimbursement rates for prescription drugs at some 

discount off of average wholesale price, otherwise known as AWP, 

also commonly called ‘‘ain’t right price.’’ Many of you here might 

be familiar with all the Federal and State lawsuits revolving 

around AWP. There have been many multimillion dollar settlements. 

The problem is that our industry continues to use that system, 

and it is that system that will continue to pass these price increases along to the consumer. We should also note that all the 

Medicaid programs predominantly use AWP for their own reimbursement also. The typical reimbursement, by the way, just for on 

average for State Medicaids and for what the PBMs negotiate, is 

about 14 percent as a discount off of AWP that they actually pay 

the pharmacy. 

AWP is directly related to wholesale price. It is typically 20 percent or 25 percent above wholesale price. So when wholesale price 

62 

increase, so does AWP, which, in turn, drives up the reimbursement to the pharmacy and, consequently, the patients’ copay. 

Price increases to both patients and payers, can, theoretically, be 

offset through rebates. PBMs combine AWPs with rebates to determine the total cost of a drug to the payer. Lower-cost drugs are 

sometimes placed in a lower copay category to encourage patient 

selection and thus reduce their cost and the cost to the payer. 

The New York Times article cites analysts and a 2007 congressional study as saying these rebates often accrue to the middlemen 

and not to consumer. My experience in the industry supports this 

claim. 

Although PhRMA Senior Vice President Ken Johnson has 

claimed that the pricing studies were incomplete because they did 

not consider the rebates, he is wrong. He forgets the basic nature 

of rebates. These rebates are not paid out of generosity or altruism. 

They are negotiated vigorously on relative prices for drugs within 

specific therapeutic categories. 

The eight largest pharmaceutical companies all had comparable 

increases. So if all the prices went up at about the same rate in 

the same time period, there would be no rationale for new or additional rebates as the relative prices would remain constant. Payers 

would have no leverage with which to pit one company against another in order to derive new rebates. 

Under this regime and with the system that we use, the payers 

and the patients will just have to pay more for the drugs, seniors 

included. 

Thank you. 

[The prepared statement of Mr. Hamilton follows:] 

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Senator NELSON. Thank you, Mr. Hamilton. 

Ms. McKenna. 

STATEMENT OF WILLAFAY MCKENNA, MEDICARE PART D 

PARTICIPANT, WILLIAMSBURG, VA 

Ms. MCKENNA. I want to thank each of you for allowing me to 

speak this afternoon very briefly on what my experience with Medicare Part D has been. 

I anticipated this program with a great deal of hope as it was 

debated in Congress in the months before it passed. I was pretty 

horrified at the thought of the doughnut hole, but one thing that 

saved me in the first year was that I found or I misunderstood the 

bill and thought that the out-of-pocket expenses that would take 

me to the doughnut hole were my own expenses. 

But of course, they include the insurance company payments. So 

when I went into it, it was a big shock. That was my first year. 

Just before I went into the Part D program, I purchased one of 

my prescriptions for insulin, and I paid a total of $77. That was 

$44 for the drug and a modest copay under the plan that I had at 

the time. As you will see from the information I submitted, at this 

time, the drug that I paid $44 and a copay for in 2005 is now selling for $239.99. 

I have also experienced the doughnut hole in each year that I 

have been with the program. Each year, as the doughnut hole has 

changed in its breadth and its range, even though the drug prices 

may have stayed the same or if they go up a little, they never quite 

match what the doughnut hole has done. So it has been a constant 

problem. 

I have insulin-dependent diabetes. I am on two different insulins, 

which I take several times a day. In addition, I am on three other 

medications that are used generally with diabetics for the maintenance or prevention of the typical kinds of side effects and other 

complications that you can have with the disease. 

There is no generic insulin, and that is a definite criticism. Surely the copyrights or the patents or whatever controls the drug manufacturers has run out now. Here we are in 2010 with what is basically a simple drug that is made up of some kind of RNA or DNA, 

but there is no protocol to allow a drug company to come in and 

know how to get approval through the FDA. That is part of the 

problem. 

Also I would say that the transparency that has not been available to seniors in examining the plans each year, that is being addressed now. The first year that they were included on the Medicare website, they were quite inaccurate. This year, they were 

much better, and I think that Medicare has done a marvelous job 

with its Plan Finder. It is very, very helpful, and I do have some 

suggestions about that later. 

The one last thing I would like to address with you is that this 

year because something happened with one of my drug manufacturers, I am now purchasing one of my drugs from Canada. The 

manufacturer of one of the cartridges that I use for insulin discontinued those as of December 31st. They are sold all over the country, but they are no longer available in the United States. 

66 

I was switched to a different insulin by my endocrinologist, and 

as with a series of insulins before that, I developed an injection site 

reaction that was a horrible thing, and I was taken off that drug. 

I contacted the drug manufacturer, the FDA, Medicare, everybody 

else, and I kept sending letters. Finally, in late December, I received a letter from the FDA, which did not guide me and direct 

me but let me discover for myself that it would be legal for me to 

purchase this drug in Canada. 

Even though I went through the process with fear that it would 

never arrive because it would be confiscated and within a very, 

very uneasy feeling when I had to go to the post office to pick it 

up, absolutely certain that out of the door with the package would 

come a bunch of Federal agents and spirit me away. I got through 

that, and I am now using it. The packaging is exactly the same. 

The only difference is that it is printed in English on one side and 

French on the other. 

The information contained within the package, it is the same 

writing. It says the same thing. It is all the same, but the 

price—$65 is the full price for the Canadian prescription. Then I 

paid $10 for insulated packaging to get it here, and that is remarkable to me. That expense that I will bear myself will probably keep 

me out of the doughnut hole this year. 

I very quickly want to go through, as somebody who deals with 

the program but is not professionally involved in it, some suggestions that I have. I really think this is a laudable thing to do. Medicare people being the senior citizens of this country, many of them 

on a limited income, particularly with the people who are now experiencing it because they grew up in a time when Social Security 

was offered as the way to retire. Remember the old ad? Retire on 

$300 a month in Florida? 

Well, anyway, the first thing is I think that allowing Medicare 

to negotiate with the pharmaceutical companies for the drug costs 

is just about the only way that may give some relief in this thing, 

in this whole program. Permitting Medicare, and if you want to 

keep the private drug companies involved or the insurance companies involved, let Medicare contract with them to process the 

claims, but not to run the program. 

I would also note that Medicare pays faster on its medical bills 

and provides more information to the Medicare participants than 

any of the insurance companies do. We may get a statement once 

a quarter from the private insurance company, but we get them 

constantly from Medicare. 

Encourage the FDA to issue rules for development of generic biologics like insulin. It is absolutely ridiculous that a simple drug, a 

basic, simple, biologic drug could undoubtedly be put on the market 

here for a very minimal price. It was a low price even 10 years ago, 

and it has gone sky high and it hasn’t changed. 

Consider a modest increase in the withholding tax for Medicare. 

Obviously, when Medicare was made available decades ago, the anticipated costs could never—didn’t anticipate pharmaceuticals. It 

didn’t anticipate the higher cost. But like for my secretary, I think 

I deduct like $6.08 out of a pay period. I would go to $7 at least 

without—I wouldn’t think twice about that. 

67 

Finally, consider a grading part for Part D programs, a grading 

similar to what Medicare used to do when it did the A to F 

groupings for the Medigap insurance that was sold some time ago. 

But that way, if the participant could identify the specific health 

problems they are having and get those programs that are graded 

for them, that might be helpful. 

I would just say one more thing, and that is Mr. Dicken, I think, 

mentioned the big tier of the drugs. One of the years, my insulin 

was in that tier, and I certainly can’t understand that. It never 

costs $600 a month. It is not a rare drug. It is not a controlled substance. But it was in Tier 4. Of course, that upped the price. 

Senator NELSON. Yes. 

Ms. MCKENNA. Thank you very much, and I appreciate the opportunity again. 

[The prepared statement of Ms. McKenna follows:] 

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Senator NELSON. Thank you, Ms. McKenna. 

Before you go, Senator, what we will do, we have got about 61⁄2

minutes to get over to the floor to vote. We will recess right now. 

We will pick up with Mr. Calfee, and then I am going to flip it to 

you for questions first, Senator Corker. 

Thank you. We will stand in recess. 

[Recessed.] 

Senator NELSON. Good afternoon. The committee will resume, 

and sorry for the interruption. But when it is time to vote, it is 

time to vote. 

Mr. Calfee, you are recognized. 

STATEMENT OF JACK CALFEE, PH.D., RESIDENT SCHOLAR, 

THE AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Dr. CALFEE. Thank you, Mr. Chairman. 

I would like to thank you and the committee for inviting me to 

testify. The views I present are my own, not those of the American 

Enterprise Institute, which does not take institutional positions on 

specific legislation, litigation, or regulatory proceedings. 

My testimony focuses on three topics—price trends for the mostused drugs among the elderly, the influence of the Medicaid drug 

price rebate program, and international patterns in drug pricing. 

A series of reports from AARP on price changes for the most-used 

drugs for the elderly has attracted considerable attention, including 

in these hearings. These reports find that branded drugs typically 

have annual price increases substantially greater than increases in 

the Consumer Price Index. 

For example, the April 2009 report said that during years 2002 

through 2008, price increases for branded drugs ranged from 5.3 

percent to 8.7 percent. These results are very misleading. The 

AARP reports failed to describe the impact of the ongoing wave of 

patent expirations and generic entry for many blockbuster drugs. 

These reports disguise the dramatic price declines that have occurred for such widely prescribed molecules as Ambien, Aricept, 

Flomax, Fosamax, Neurontin, Norvasc, Pravachol, Prevacid, 

Protonix, and Zocor. 

Instead, the AARP tables track prices for the branded versions 

of these drugs, even though the market has shifted dramatically to 

generic versions. Notwithstanding the AARP reports, which seem 

to show steadily increasing drug costs for seniors, actual events 

demonstrate a central characteristic of the pharmaceutical market, 

which is that a period of profitable prices for drugs under patent 

is followed by dramatic price reductions that permit patients to obtain some of the best drugs we have at very low prices for years 

to come. 

So-called specialty drugs are also important. These are usually, 

although not always, biologics rather than chemical compounds. 

Created through biotechnology methods, they are often very expensive. Although they are presently not subject to generic competition, through application of the Hatch-Waxman Act, a regulatory 

pathway for post-patent competition may well be created soon by 

new legislation. 

The price effects would come relatively slowly, however, because 

of the complex nature of these products. On the other hand, speVerDate Nov 24 2008 12:07 Jul 28, 2010 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 H:\DOCS\57544.TXT SAG PsN: JOYCE
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cialty drugs typically address longstanding unmet therapeutic 

needs. They have revolutionized the treatment of, to cite a few examples, MS, rheumatoid arthritis, some forms of cancer, and the 

leading cause of blindness in the elderly. Despite their costs, specialty drugs remain an example of how the competitive marketplace creates previously unobtainable medical solutions despite the 

tremendous costs and uncertainties of the R&D process. 

A very different set of economic issues is raised by a proposal introduced in the Medicaid drug rebate, which pertains the dual eligibles who qualify for both Medicaid and Medicare Part D. Research has demonstrated that the Medicaid rebate has tended to 

increase prices in the private sector. An expansion of the scope of 

the Medicaid rebate seems likely to reinforce a tendency to bring 

higher drug prices in the private sector even as the Medicaid system gets lower prices. 

Finally, there is the matter of international disparities in patented drug prices. Research has consistently found large differences, sometimes more than twofold, although this is usually not 

true for specialty drugs. These disparities arise from three factors—the tendency to charge higher prices in wealthier nations, 

and the United States is the wealthiest nation; the fact that some 

drugs save money in healthcare services, which cost more in the 

U.S., making these drugs more valuable here than elsewhere; and 

most important, Government price controls that have been implemented in all rich nations other than the United States. 

The result is that the U.S. market provides a disproportionate 

share of worldwide pharmaceutical profits. This means that other 

wealthy nations are, to a significant extent, free riding on U.S. 

R&D investment that is motivated by the search for profits and 

which remains a dominant source of valuable new treatments. Unfortunately, there is no easy solution to this problem, although 

there are some measures that could provide some help. 

Mr. Chairman, that concludes my oral testimony. Additional details are provided in my written testimony. 

[The prepared statement of Dr. Calfee follows:] 

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Senator NELSON. Thank you, Mr. Calfee. 

Senator Corker? 

Senator CORKER. Thank you. I want to thank each of you for 

your testimony, and I have a—like we always do, I have got a conflict. I am going to leave very briefly, but I think your testimony 

has been outstanding. 

Senator Nelson, I appreciate you calling this hearing and for the 

explanation you gave on the front end. 

Let me say, generally speaking, I have concerns, as I mentioned 

on the front end, about the high cost of brand name drugs here. 

We have talked to trade representatives from both administrations, 

explored things like ‘‘most favored nations’’ clauses and those kind 

of things to deal with it. 

But I am going to ask some questions to sort of look at the other 

side of this, not that I am in any way debunking what is before 

us today. But when I was in Tennessee as commissioner of finance, 

we had a program called TennCare, and in that program, we did 

not have things like the doughnut hole or appropriate copays. What 

we found was that drug utilization just went through the roof, OK? 

While I have—my heart goes out to Ms. McKenna and the issues 

that she is dealing with, sometimes we have unintended consequences with policies like this. I wondered if you might comment 

as to the effect, if you will, of not having some of the financial constraints that exist, which are very difficult for some people, but 

what the unintended consequences might be as it relates to actual 

drug utilization? 

Mr. Anderson. 

Dr. ANDERSON. Sure. Thank you. 

What I am really concerned about is that I think you definitely 

need to have co-insurance, and at the beginning of the doughnut 

hole, you have 25 percent co-insurance, which I think is quite high 

compared to what we have from other goods and services. But essentially, that is the co-insurance. 

The problem is, obviously, the doughnut hole, and what happens 

when you enter the doughnut hole is that your incentives change 

dramatically. As I said, 10 percent of the diabetics stop taking their 

medications when they entered the doughnut hole. Eighteen percent of the people with osteoporosis stop taking their thing, and 

that leads to further expenditures in the Medicare program because now they are going to be hospitalized. They are going to need 

emergency room care. They are going to need a whole set of things. 

So it is really penny wise and pound foolish in a number of instances to have this doughnut hole and have these people paying 

so much, and they can’t afford it. I mean, $5,000 for a Medicare 

beneficiary making $20,000 a year is a quarter of their income. 

That is an awful lot of money to pay just on prescription drugs. 

Senator CORKER. You know, we hear a lot about the fact that the 

reason drug prices are so high here is that we do so much research 

and development in this country of new drugs, and we get them to 

the markets quicker here. Our seniors actually take advantage of 

them more quickly. 

At the same time, you look around the world in other places 

where prices are negotiated and set, and there is a lot of research 

and development that is taking place in those other places. Is that 

82 

because they are able to still sell into the U.S. market, or is the 

whole issue that we talk about as far as research and development 

one that is a myth? 

I guess I will ask whoever is most qualified to answer that. 

Dr. ANDERSON. Well, let me try again. Basically, what we are 

spending is 15 percent of our drug budgets in most pharmaceutical 

companies on research and development. We are spending 30 percent of our budgets on marketing. 

So I am all for more research, and I think we really need to 

change the incentives for pharmaceutical industries to spend more 

than 15 percent. If we had higher drug prices and they were spending 50 percent of their things on new research and development, 

I think that would be great. But at 15 percent on research and development, I just don’t think we are getting value. The other countries are just getting all that. 

So if we had unlimited money, if we didn’t have a deficit in the 

Federal Government, a trade deficit with the rest of the world, I 

think that would be fine. But we do. 

Senator CORKER. Mr. Dicken, I read a report, CBO report, I 

guess, talking about the fact that if we had actually negotiated— 

if we negotiated prices for our brand drugs, that at the end of the 

day, which seemed like it was counterintuitive to what much has 

been said about the actual negotiation for brand drug prices. But 

I read a report that said there would actually be very little saved 

if we did that, and I wondered if you might respond to that? 

Mr. DICKEN. Well, I think part of what CBO’s analysis was, was 

that one of the things that will drive how much plans or in this 

case the Government, could negotiate in savings, is dependent on 

the formularies and to what extent they can steer particular utilization to particular manufacturers. I think CBO’s estimate was 

based on an assumption that it would not be within the Medicare 

program’s ability for the Government to negotiate with having restrictive limited formularies. 

Senator CORKER. Mr. Chairman, I have a number of questions I 

want to submit for the record. I have got to go on. I know that 

these witnesses have been waiting a long time, but I thank you for 

the hearing and look forward to the results. 

Senator NELSON. Thank you, Senator Corker. 

Mr. Chairman Kohl? 

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

I would like to ask each and every one, or one or two on the 

panel, is there any justification in your mind, in terms of the people of our country, for Americans to be paying twice as much for 

the same product as is sold in other countries when particularly we 

manufacture the product here? In many cases, the costs of a product’s development is paid for by tax dollars through the NIH? Is 

there any justification for that? 

How we get to an answer might be another question, but is there 

any way that you can justify that in terms of the American consumer? Anybody think that there is a justification for it? We should 

pay twice or three times as much? 

Yes, Mr. Calfee? 

Dr. CALFEE. Well, I guess it depends partly upon what you mean 

by ‘‘a justification.’’ I mean, the reason those prices are so low is 

83 

because of price controls that are implemented by those nations. In 

most cases, the manufacturers would like very much to charge 

higher prices in some developed nations but are prohibited from 

doing so. 

I think it is worth bearing in mind that in a normal world in 

which you didn’t have any kind of price controls at al, prices in the 

U.S. would be higher than they are in those countries for a couple 

of different reasons, which I mentioned earlier. Some of these drugs 

are just worth a lot more in the U.S. than they are in France or 

Switzerland or Germany because when they save days of 

healthcare here, which they often do, the cost of the healthcare 

services they save is much higher here than it is over there. So, 

the drugs are more valuable here than they are there. 

The Nation is wealthier, wealthier people tend to pay more for 

products generally. There would be a disparity, but it wouldn’t be 

as big as it is now. There are some elements of unfairness, just as 

you suggest. 

I think one thing is worth paying attention to, and Gerry Anderson mentioned this in his remarks, and that is that the U.S. market for generics is extremely competitive and extremely efficient. It 

is that way because we have a very open market. 

There are a number of European nations which make it rather 

difficult for generic manufacturers to enter into the market. They 

tend to favor their domestic generic manufacturers, and in fact, 

several years ago, Mark McClellan, who was then the Commissioner of the FDA, gave a speech in which he pointed out that for 

many European nations, if they were to open up their generic market to competition instead of favoring their domestic manufacturers, generic prices would drop so much that they could go a long 

ways in raising branded prices toward U.S. prices without actually 

paying anything more. 

So, there is an element of trade restrictions there, that I think 

is probably worth pursuing at some level. 

The CHAIRMAN. Anybody want to make a—is there any justification in your minds for we who represent the American people defending two and three times as much being charged for those 

brand-name drugs here as they are anywhere else. 

Mr. Anderson. 

Dr. ANDERSON. I can’t think of one. I mean, I think, basically, the 

problem is that we have many people that are paying lots of 

money, $5,000, to get through the doughnut hole. That is a huge 

amount of money. It really affects their access, and most of the reason why they are in that doughnut hole is the price and the utilization of brand-name drugs. 

So it really affects the American senior substantially to pay these 

high prices, and I think—I wouldn’t mind paying it if we didn’t 

have a trade deficit and if all the seniors were getting drugs free 

of charge. But they are not. 

The CHAIRMAN. OK. I wanted to get that clear. I assume you, 

Ms. McKenna, believe there is no real justification other than it is 

just happening, not that you believe it is right. Is that true? 

Ms. MCKENNA. I have heard a lot of the comments about the research and development, and I understand that. But when I think 

about the last 5 to 10 years when we were bombarded with adverVerDate Nov 24 2008 12:07 Jul 28, 2010 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 H:\DOCS\57544.TXT SAG PsN: JOYCE
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tisements on television, ‘‘Ask your doctor about this, that, and the 

other thing,’’ that is so offensive when as just one person in Part 

D out of, what is it, 40 million people who are using Part D, one 

of us has a concern about that and is confronted with it every day, 

why isn’t that spent on providing the drugs at less cost to the large 

group of people who are elderly? 

The CHAIRMAN. Yes, Mr. Calfee? 

Dr. CALFEE. If I could say something about marketing and R&D? 

A couple of things: First, is the 30 percent figure mentioned by 

Gerry Anderson. That number is inflated because it includes the 

samples that are provided, the free samples that are provided to 

doctors. Those are valued at wholesale prices, and that is a pretty 

big chunk. On the order of half of all marketing consists of giving 

away samples, which doesn’t really cost the manufacturers very 

much at all. 

If you correct for those numbers, they probably spend more in 

R&D than they do on marketing. But you have to remember that 

they do marketing in order to make money. They do it in order to 

increase their profits. Those profits are the source of their R&D. 

Large manufacturers, don’t go out and sell bonds in order to fund 

their R&D. They fund their R&D out of the cash that they bring 

in from selling their drugs. If you eliminate their marketing, you 

probably reduce sales. You reduce their profits, and you reduce the 

money that is available for R&D. It is not a tradeoff between the 

two. 

Now 15 percent doesn’t sound like very much for research out of 

total revenues, but in fact, it is extraordinarily high. I don’t think 

there is any other industry that comes close to that level. Now we 

can sit here and we can try to figure out what that percentage 

ought to be, but I don’t think anyone knows what that percentage 

ought to be. It is really a matter of how manufacturers want to 

spend their money in order to try to figure out what they can do 

to find a new cure. 

It is a very, very difficult business, and there are a lot of drugs 

that we need that manufacturers are not working on, like new 

antibiotics, malaria drugs, and so on. No one else is coming up with 

these drugs. So, I think we have to remember it is a chase for profits that is the source of the drugs that we are getting, and it makes 

sense that we should at least pay attention to whether or not we 

are going to be getting a lot more new drugs in the future because 

there are a lot of unsolved problems, such as the illness that Ms. 

McKenna is dealing with. 

The CHAIRMAN. Yes, sir, Mr. Hamilton? 

Mr. HAMILTON. First of all, I am not going to try and justify 

those prices. But I can offer a couple of explanations. 

One is that in the pharmaceutical industry, absent of generics— 

I am talking the brand-name world—cost to manufacturer to bring 

a product to market is only considered when you first look to 

launch a drug. Pharmaceutical companies will scope the market. 

How big is the market? How many patients could take this? How 

many pills or tablets or injections can I sell? 

It may be some idea of what kind of price, and that will help 

them decide whether to pursue that drug or not. But once the drug 

is on the market, the cost of the drug has nothing to do with its 

85 

price. As Jack said, talked about the cost of samples, samples cost 

a lot more than yet the drug does going to the pharmacy, and that 

is because of basically the packaging and storage and shipment to 

reps. 

So cost, unlike many other situations, you know, if you are going 

to make something, you think, ‘‘What is it going to cost me, and 

therefore, how much am I going to sell it for?’’ It doesn’t exist in 

the pharmaceutical industry. You sell a product for whatever the 

market will bear. 

Another factor that comes into play in domestic marketing is several other nations, I see many other nations benchmark their U.S. 

pricing. They will pay a percentage for a drug based off of the average selling price, calculated quarterly on domestic products. So the 

higher you can keep your price here in the United States, the more 

money you are going to make abroad. 

The CHAIRMAN. Thank you. 

Thank you, Mr. Chairman. 

Senator NELSON. Thank you, Senator Kohl. 

Senator LeMieux. 

Senator LEMIEUX. Thank you, Mr. Chairman. 

Thank you to my colleague Senator Nelson for having this hearing today. 

Thank you all for being here to testify, especially you, Ms. 

McKenna. I appreciate your good words, and it is important for us 

to put a face on these problems. 

Senator Nelson and I represent Florida, and this issue comes 

home loud and clear in our State, with the highest per capita population of seniors, more than 3 million folks on Medicare. 

Now the issue that I want to focus on with you is just the cost 

and why it is so expensive and why it continues to be more expensive, and there has already been some good testimony on this 

today. 

Mr. Hamilton, in a prior life, I was the deputy attorney general 

in Florida, and we dealt with AWP cases, and I guess they are 

AMP now, and I have been through those cases that we have tried 

to figure out in the Medicaid program in Florida why we weren’t 

getting the best price. Really is average wholesale price truly the 

best price, or is there some discount, as you say in your testimony, 

25 percent perhaps, below that? 

So I am familiar with the work that you have done and know 

that the struggles that both the Federal Government and the State 

governments deal with in trying to make sure that we are getting 

the best price. 

I think, Mr. Dicken, I want to ask you the first question, and 

that is, you know, the Federal Government representing, in a way, 

so many consumers of pharmaceuticals should be able to negotiate 

better prices on these drugs for Medicare and Medicaid and veterans recipients. 

I understand the analysis you did, and I understand on a drugby-drug basis those discounts don’t seem so appealing. They might 

be 10 percent or so. But why can’t the Government, when representing so many consumers, be able to go to a particular drug 

company and say we are not going to just negotiate on Lipitor, we 

are going to negotiate on all of the drugs? 

86 

Based upon the volume of the people that we represent in our 

consumer pool, we are going to get the best prices. Are we doing 

as much as we can to negotiate? 

Mr. DICKEN. As you know, there are a variety of different approaches that different Federal programs use to attempt to negotiate or set prices for drugs. So, certainly, the Part D program in 

Medicare is relying on private plans to do those negotiations. Many 

of them will establish formularies within guidelines that are established by CMS that limit the ability to restrict drugs in certain 

classes, and so the Medicare program is relying on the private 

plans to do those negotiations. 

Senator LEMIEUX. Is that through their PBMs? 

Mr. DICKEN. Often contracting with a PBM that would do the negotiations with the manufacturers. 

Senator LEMIEUX. How do we know that they are getting the 

best price? If we are segmenting the market, are we not getting the 

best price when they have a smaller volume of people that they are 

negotiating on behalf of than the entire Federal Government would 

be able to have that ability to negotiate? 

Mr. DICKEN. Well, it is a very different approach for Part D that 

does rely on multiple different Part D plans to be negotiating. They 

may have differences in their formularies and the price that consumers may find on Plan Finder for different plans. So, it is relying 

on both those plans to negotiate and for consumers to choose the 

plan that would best meet their needs. 

That may be different from, say, a VA program which does have 

a formulary and set prices that may look different from what may 

be existing in Medicare. So the Federal Government, through a 

number of different programs, has a number of different prices for 

the same drugs. 

Senator LEMIEUX. Let me go to Mr. Hamilton and then to Dr. 

Anderson. 

Mr. HAMILTON. A couple of things. First of all, the Federal Government, through two different programs—one is the Federal supply schedule, which is the VA, DoD, and Indian health, and the 

340B program—through both of those programs, they negotiate on 

a national level, and they do a very good job of it. If that was applied to Part D, you would see discounts far better than anybody 

is getting right now. 

But they also have an advantage in that they have a formula for 

the Federal supply schedule and the 340B runs off of the Medicaid 

rebate program. So they start off with a certain discount off of 

every drug, regardless of the number of competitors or what leverage a particular plan might have based on utilization or anything. 

They start off with a basic discount no matter what. Then they negotiate from there. That is called the ceiling price. 

So we already have in place two systems that work very, very 

well to drive down the cost of drugs for patients. The DoD, for example, has a mail-order facility. As a matter of fact, they hired my 

former employer, Express Scripts runs it in Arizona, where they 

have literally massive machineries and canisters and gazillions of 

pills. They fill the scripts and send them out to DoD recipients at 

a fraction of what you would pay anywhere else. They do that beVerDate Nov 24 2008 12:07 Jul 28, 2010 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 H:\DOCS\57544.TXT SAG PsN: JOYCE
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cause they buy off the Federal supply schedule, which starts with 

a discount and then negotiates after that. 

So, certainly, regionalization of plans reduces their ability to negotiate. Remember, they don’t start with a given discount. They 

start at retail. 

Senator LEMIEUX. Dr. Anderson. 

Dr. ANDERSON. Thank you. 

If you look at the 2003 Medicare law that created Part D, there 

is something called ‘‘noninterference.’’ Basically, that says that the 

Medicare program can’t negotiate directly with the drug companies. 

So that is essentially the answer to your question why Medicare 

doesn’t do it. 

If you look across the Federal programs, what you will see is that 

they are paying a two-to-one difference. The DoD and the VA typically pay the least. The Medicare program typically pays the most 

for most things, and there is the two-to-one difference. 

So if you are talking market power, the Federal Government is 

the largest purchaser of drugs in the world, and it should be getting a very good deal. But it is totally splintered in that it is buying 

all sorts of things in all sorts of different ways, which means that 

it is not using its market power or its regulatory power to its fullest. The seniors and everybody else is paying very different 

amounts. 

Senator LEMIEUX. Mr. Calfee. 

Dr. CALFEE. Yes, I think it is worth remembering that the ability 

to negotiate lower prices has almost nothing to do with the size of 

the entity that is doing the negotiating. Gerry Anderson mentioned 

that some of the lowest prices in the world are from New Zealand. 

New Zealand is a very small country. The entire population of New 

Zealand is probably less than the Medicare population of Florida 

alone. 

What gives them the ability to negotiate these things is to look 

at several different competing drugs in a therapeutic category and 

to play off one manufacturer against another. The VA does very 

well in its negotiations, because it tends to have very narrow 

formularies. 

In Medicare Part D, for many therapeutic categories, the 

formularies cannot be very narrow. It is against the law. You have 

to include every drug in a particular category. So that is what really drives the ability to negotiate lower prices. 

I think it is also worth remembering that if you start out with 

a policy of having just a percentage discount, where does the price 

come from, the original price that you are discounting from? At 

some point, if all the drugs sold to the Federal Government are 

going to be 30 or 50 percent less than the prices in the private sector, those prices in the private sector are going to adjust, because 

manufacturers know that whenever they set those prices, they are 

setting a much lower price for the Federal Government. 

So it is very hard to solve these things through just simple formulas, I think. 

Senator LEMIEUX. Well, I appreciate the testimony, and I agree 

that these formulas, it is hard to set them, and they certainly can 

be gamed once you do set them. But the comments that were made, 

I think, from Dr. Anderson and Mr. Hamilton is that we are losing 

88 

our ability, based upon the size of the Government. I don’t mean 

the size of our entity. I mean the size and the number of people 

that we represent, which is volume, and certainly that has something to do with the ability to negotiate. 

Maybe not the only factor, Mr. Calfee, but certainly a factor, that 

this noninterference clause makes no sense to me. That we would 

give up our right to have that ability to negotiate doesn’t make 

sense to me. 

I mean, it occurs to me, Mr. Chairman, that we want to hit the 

sweet spot of allowing these companies to develop the best drugs 

in the world. We don’t want to stifle that. We don’t want to put 

this in a situation—we can’t be Canada, where the research is not 

happening and just take, cap these prices and say, well, we will 

buy them at this price, and we won’t buy them at any other. We 

can’t do that because we are doing the innovation. 

You have to applaud these companies for doing the innovation. 

It is saving lives around the world. But at the same time, we want 

to get the very best price. It is appalling to me that these other 

countries are freeloading off of our R&D. I wonder, Mr. Chairman, 

that our U.S. Trade Representative shouldn’t be talking about 

these issues when he is dealing with folks from other countries. 

I want to talk about what has been called the doughnut hole, and 

I know that my colleague from Florida will recognize doughnuts 

are—everybody likes doughnuts. I think we have named it the 

wrong thing. We should call it the black hole or the sink hole because a senior who falls into it has a tough time of getting out of 

it, and words matter. 

What can we do under the existing law—I mean, maybe we can 

change the law. But what can we do under the existing law, if anything, to help seniors who are in this hole? They are struggling. 

They are certainly struggling in our State. Ms. McKenna has given 

us great testimony about that. Is there anything we can currently 

do, or do we just have to change the law? 

Who wants to take a stab at that? 

Dr. ANDERSON. Well, I think price transparency is an important 

thing and a Republican thing as well. I mean, we just don’t know 

the prices for these drugs, and we should. I mean, it is important 

for the Medicaid program, as you know, in the past. It is important 

for the Medicare program. 

We also don’t know the level of cost-sharing. So I looked at Part 

D drugs, and sometimes the Medicare beneficiary is only paying 5 

percent of the cost because the drug company is paying 95—I am 

sorry. The Part D plan is paying 95 percent of it. In other drugs, 

they are paying 60 percent of the cost. 

So, it is sort of the Part D plan is making a judgment of what 

the beneficiary should pay for different drugs, and I can’t understand a rhyme nor reason for it. But if I am a person that is going 

to sign up for one of these Part D plans, I want to know what the 

plan is going to pay, and we don’t know that. 

Senator LEMIEUX. Mr. Dicken. 

Mr. DICKEN. I think certainly Dr. Anderson mentions a good 

point with price transparency. Just a couple of other things to 

think about. Some of the drugs that have high costs that lead individuals into the doughnut hole may be ones with a lack of theraVerDate Nov 24 2008 12:07 Jul 28, 2010 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 H:\DOCS\57544.TXT SAG PsN: JOYCE
89 

peutic alternatives, and so, if there were options to have more competition there. 

The other thing is one of the ways that plans that we have just 

talked about will attempt to reduce costs is through negotiating rebates. Those rebates may reduce the costs overall and are passed 

onto the programs through lower premiums but aren’t affecting the 

costs that the individuals pay at the drugstore. Those will be reduced by discounts that are negotiated with the pharmacy. 

But the rebates don’t necessarily go to that individual who is 

showing up at the drugstore other than reducing the overall program cost. 

Senator LEMIEUX. Can I just ask you one question about that? 

Does the pharmacy have any incentive under that rebate program 

to pass those savings along to the customer? 

Mr. DICKEN. Well, there are different types of price concessions 

here. So I was speaking about rebates from the manufacturers that 

would go back directly to the plan or the PBMs. Certainly, the 

plans are also negotiating discounts with the pharmacies and competitive and trying to encourage, in some cases, networks of pharmacies where they will negotiate lower prices. That would be the 

incentive for the pharmacies to participate in those discounts. 

Senator LEMIEUX. Mr. Hamilton. 

Mr. HAMILTON. Those discounts you are talking about, the rebates. The rebates are typically negotiated by a PBM. Some insurance companies have their own PBM internally. So they would do 

it. But the PBM function negotiates the rebate, collects the rebate, 

sometimes passes those rebates on to the plan. Sometimes they 

keep them. It depends on what their contract with the plan is. 

But those rebates don’t go back to the pharmacy, to answer your 

question. No, the pharmacy doesn’t get those rebates. Those rebates are kept by either the PBM or the plan. The PBMs negotiate 

network contracts with the pharmacies at some discount, again, off 

of AWP. There we go back to the problem of AWP. 

Senator LEMIEUX. I remember a line of cases about pharmacies 

and AWP. That is why I remembered to ask that question. 

Mr. HAMILTON. That is what happens. The PBM goes out, develops a network, and they pay, let us say, 14.5 percent is what they 

negotiate with the CVS or Walgreen’s to pay them. Then they go 

back to their plans, and they say, all right, I will reimburse your 

claims, but I am going to charge you 14.6 percent. So, the plan 

pays one thing, the pharmacy gets another. But the rebates don’t 

go back to the pharmacy. That amount is calculated based on AWP, 

and there again, we go back to the problem with the system. 

Senator LEMIEUX. Anything on the first question that you think 

we can do without changing the law to help with this problem of 

people who are in this hole? 

Mr. HAMILTON. I think—like John said, I think the best thing 

without changing the law is to negotiate more rebates and negotiate them in a way that guarantees they go back to patients. 

Senator LEMIEUX. Thank you. Anyone else want to comment on 

that? 

Ms. MCKENNA. I would just say a couple of things about that. I 

feel that the basic amount that is paid for the participation in Part 

D could be adjusted. Maybe increase that a tiny bit, but then have 

90 

just a standard drug plan. Get rid of the tiers and the formulas and 

everything else. These are impossible for most seniors to understand. 

I have a lot of seniors who come to me in my practice, and continually, it is more and more questions each year that I get from 

them. Even from a neighbor who came, and I spent almost 2 hours 

with a person who is a college professor and couldn’t understand 

the choices because it is foreign. It is not like any other insurance. 

But that way, yes, there are going to be very expensive drugs. 

But probably on the low end of the scale, everybody is going to pay 

a little too much for the very inexpensive drugs. But those payments for those at a reasonable rate are going to accrue to the benefit of all the others who are participating and who are on higher 

drugs. 

The formularies have a great deal of difference in how your 

copay is calculated. The higher your drug is on the formulary, the 

more you are going to pay. But I think that would be helpful. 

Senator LEMIEUX. Thank you, ma’am. 

Mr. Calfee. 

Dr. CALFEE. Yes, just very briefly, I think it is worth remembering that when Part D was first created in the 2003 law and was 

implemented in 2006, there were a lot of estimates coming out of 

CBO and elsewhere about how much that program would cost. It 

ended up costing a lot less than was expected, and that undershooting of cost continued for several years. 

It was because of the extraordinary level of competition amongst 

the Medicare Part D plans, partly because of the activities of the 

PBMs. That competition has resulted in pretty good deals. Premiums have been down. Drug costs have been down. Medicare 

costs have been down below what they would have been. 

So I would just exercise some caution when contemplating doing 

away with a lot of that competition. You might end up with something that would be very, very much simpler and easier to deal 

with, but it might be more expensive, too. 

Senator LEMIEUX. Mr. Chairman, I want to give you an opportunity. I know you have questions to ask, and I thank you again 

for having this hearing. 

I would like to just take a moment of State privilege, which I 

know you will appreciate, is that I was reading the Lakeland Ledger the other day, and our friends at the company of Publix are now 

offering some diabetic drugs for free. So there are good folks out 

there trying to do the right thing. 

Thank you, Mr. Chairman. 

Senator NELSON. You recall one of the major retailers in the 

country a few years ago turned the pharmaceutical world upside 

down, when Wal-Mart came out with a group of about five commonly used drugs, and they were offering them for something like 

10 bucks. So, Mr. Calfee, what we are trying to do, regardless of 

what happened with the prescription drug bill back in 2003, we are 

trying to figure out how we can make it more affordable for folks 

that are on fixed incomes. 

Dr. CALFEE. I certainly appreciate that, and as you know, the 

Part D program is, to some extent, means tested. I mean, if you 

are below a certain income, then drugs cost quite a bit less. In 

91 

some cases, a lot less. Of course, if you are eligible for Medicaid, 

that is a different story, and we get into all these squirrelly problems of dual eligibles. 

I think there is a strong case for means-tested subsidies generally. Maybe there is a case—it has been a while since I have 

looked at all the parameters of Medicare Part D, but maybe there 

is a case for extending those means-tested subsidies. So, there are 

fewer people who face the difficulties that have been described by 

Gerry Anderson and by Willafay McKenna. That, to me, strikes me 

as a reasonable way for addressing the Part D doughnut hole. 

The reason it was there to begin with, I believe, was to have 

something that was structured in such a way that it would not exceed certain cost levels, but would also be attractive to almost 

every Medicare beneficiary because you wanted to have wide participation in this plan because that was going to keep down costs. 

That part of it actually worked pretty well, but it has generated all 

these other problems. 

I don’t think there is a simple solution without spending an 

awful lot more money, but there may be some middle ground in 

which there could be more in the way of means-tested subsidies 

without an extraordinary increase in costs. 

Senator NELSON. Well, in your written testimony, you cited an 

article that argues that Medicaid rebate increases, that the Medicaid rebate that I offered in the committee, in the Finance Committee that was defeated for dual eligibles, that that increases the 

price of drugs in the private sector. I want you to please follow up 

on that. 

Do you think that the private sector doesn’t have the ability to 

keep prices low if the Government is obtaining a lower price? 

Dr. CALFEE. The private sector negotiates prices with PBMs and 

other people, and they do that in competition with other manufacturers of similar drugs. When they are doing that, they take into 

account all of the pricing that is affected by their decisions. 

For example if Pfizer is negotiating Lipitor price with Express 

Scripts on behalf of some large client, say, General Electric or 

something like that, they know that if they are going to give an 

extra discount for that particular buyer and that discount becomes 

their lowest price, they are going to have to go back and reduce all 

their prices in Medicaid. 

While the dual eligible situation is a rather strange situation. 

Under your proposal, there would be more people who would be 

getting the Medicaid rebates. So, Pfizer and any other manufacturer when they are negotiating prices, would think about that, 

and they would know that when they are giving someone an exceptional discount, that exceptional discount is going to be very costly 

to them because of the Medicaid rebate. Consequently, they are not 

going to go as far in discounting prices, and that is more or less 

the logic that has been documented. 

Now the paper that I cited did not look explicitly at your proposal. It simply looked at what has been happening in the past. 

Senator NELSON. Well, let me give you the other side of that. 

Dr. CALFEE. Sure. 

Senator NELSON. Had my amendment, and this is an academic 

discussion because it didn’t pass. Had it passed, dual eligibles 

92 

would get the same rebate when they got their drugs in Medicare 

that they were eligible to get those same prices under Medicaid. In 

fact, CBO scored it, and it would produce over $100 billion over 10 

years. What we could have done with that is we could have filled 

the doughnut hole for seniors and had money left over to apply to 

the Federal deficit. 

Now here is what would have happened, Mr. Calfee. When you 

fill the doughnut hole, that means more people are going to get up 

into the catastrophic coverage up here. More people get up into catastrophic coverage, the pharmaceutical industry is going to sell 

more drugs, and as a result of that, the pharmaceutical companies 

are going to make more money as a result of saving the American 

taxpayer over $100 billion of paying less by Medicaid folks that are 

getting their drugs through this Medicare program. 

So, there are a lot of arguments that are common sense. We will 

have to see what comes out on the Internet tonight on the way that 

they are talking about filling this doughnut hole. But surely, one 

of the results is going to be more people will get that coverage like 

Ms. McKenna, or as Dr. Anderson had testified, they get into that 

doughnut hole. They can’t afford it. They stop taking. 

You fill that doughnut hole that the Government is going to pay 

for it. It gets them on up into the catastrophic coverage, and at the 

end of the day, more pharmaceutical products are going to be available to more people. 

Now that is not a bad thing because these drug companies are 

doing wonderful things with some of the miracle drugs that they 

are coming out with. But at the end of the day, the drug companies 

are not going to be hurting. They are going to be making a lot more 

money. 

Mr. Hamilton. 

Mr. HAMILTON. I don’t know if you know this or not, but there 

is a precedent. What you are suggesting in a way has already been 

done. The Veterans Healthcare Act of 1992 has a program called 

340B, and the 340B program provides drugs at basically the Medicaid discount to certain clinics and disproportionate share hospitals, and it is all outpatient drug stuff. 

But what that bill did, what that legislation did was basically 

take all the patients that were being treated at the outpatient facilities of disproportionate share hospitals—there are about 105 of 

those in the country, plus all the clinics. They did all the inner-city 

clinics and such and county health facilities—and turn them all 

into Medicaid patients. 

So, consequently, when you are in a drug company—and Mr. 

Calfee is right—you do have to calculate if I give somebody a discount or a rebate, which amounts to a discount, then my Medicaid 

rebate is the amount of rebate per unit is going to go up. At the 

same time, your price to the 340B entities is going to go down. 

But we have already seen all those 340B entities added to basically what is the Medicaid population, starting back in 1992, and 

that program actually is administered by the Office of Pharmacy 

Affairs that, in addition to taking the Medicaid rebate discount, 

they also negotiate prices so that it is another entity that has done 

basically what you are talking about with a different set of people. 

93 

Senator NELSON. I want to ask Ms. McKenna, you had testified 

that when the drug that you were taking for diabetes was not 

available in the United States, your doctor first put you on another 

one. It didn’t work out for you, and you realized that you needed 

to go back on the original drug. You then got approval so that you 

could get that drug from Canada, and you said it cost you $65, plus 

$10 shipping? 

Ms. MCKENNA. That is right. 

Senator NELSON. Now what was that compared to the price that 

you were buying it when it was available in the U.S.? 

Ms. MCKENNA. Two hundred thirty-nine dollars and ninety-nine 

cents. 

Senator NELSON. Two thirty-nine, ninety-nine to 65. What was 

the name of that drug? 

Ms. MCKENNA. Novolin N. N-O-V-O-L-I-N N. 

Senator NELSON. Let me ask all of you, anyone, do you believe— 

hold up this chart. Since there is no limitation on what can be 

charged for the brand-name drugs for seniors, if tonight we find on 

the Internet that the President’s proposal is that 75 percent of this 

is going to be covered for seniors, do you think the price of those 

drugs in the doughnut hole that are going to be more available to 

seniors because of the payment of 75 percent, with a senior paying 

25 percent, do you think the price of those drugs are going to go 

up? 

Dr. CALFEE. If you maintain the competitive Part D mechanism 

that you have right now, so that each individual PDP is competing 

with every other one in trying to gain sales from seniors, they will 

still have an incentive to negotiate lower prices. I think on the 

whole, all else being equal, if you increase Federal subsidies to that 

extent, which is a pretty big increase, it certainly isn’t going to 

push prices down. It might push them up somewhat. 

I think that the existence of competition would tend to moderate 

whatever price increase there might be. If you eliminate that competition, then, yes, you are asking for big price increases. 

Dr. ANDERSON. Medicare beneficiaries are not buying some of 

these drugs because they can’t afford them, and that may be that 

the pharmaceutical industry is saying we have got to keep our 

prices down in order to allow people in the doughnut hole to afford 

these drugs. If you make—if you reduce the price effectively to 

them, of course, the pharmaceutical industry is going to raise their 

prices, and they are going to raise it so that the beneficiary pays 

about the same amount as they are doing now. That would just be 

good economic sense on their part. 

Senator NELSON. Any other comments on anything that we have 

covered here? 

Mr. Dicken, are certain types of drugs more vulnerable to steep 

price increases for Part D beneficiaries? 

Mr. DICKEN. Well, certainly, in the group of drugs that we looked 

at that were very high-cost drugs to begin with, we did see price 

increases that could be—I think the example that you cited was 46 

percent over a 3- or 4-year period, and an average over 36 percent. 

We had also done a separate report looking at drugs that faced 

truly extraordinary drug price increases. These are drugs that went 

94 

up 100 percent, literally doubling in price overnight, not a cumulative increase, but a one-time increase. 

The types of issues that we saw that led to those dramatic price 

increases were things like lack of therapeutic alternatives, and so 

that there was not enough competition in that market. There could 

be consolidation and mergers, and so the pricing strategies that 

manufacturers were using changed. 

In a few cases—this was not the typical—there were some unusual manufacturing issues such as disruptions in raw materials, 

or handling of hazardous materials that led to some of those very 

high increases. So those are the types of drugs that have had the 

most dramatic increases. 

Senator NELSON. Mr. Hamilton? 

Mr. HAMILTON. When you are looking at controlling price increases, you could look at the Medicaid rebate program. The Medicaid rebate program calculates every quarter what is called the 

AMP, which starts when the drug is first marketed, and they add 

the CPI-U to that every quarter. Any increase above the CPI-U is 

added to the Medicaid rebate. 

So within the Medicaid rebate program, price increases are restricted to the CPI-U. Whether or not something like that could be 

done with Part D, I don’t know. But it certainly works in the Medicaid rebate program. 

Senator NELSON. In the Senate-passed healthcare bill, the 

amount of the rebate for brand-name drugs is being increased for 

Medicaid from 15 percent to 23 percent, in addition to what you 

just stated about the increase of the differential between the health 

inflation cost and the Consumer Price Index cost. 

Now my question to you is what happened if we just changed the 

total Part D prescription drug, and we made it a rebate program 

like Medicaid drugs? What would happen to prices? 

Dr. CALFEE. Well, my own view is that what would happen 

would be the same thing that happened with the Medicaid rebate. 

Manufacturers will take this discount into account when they are 

negotiating their own prices in the private sector, and those prices 

will tend to go up because every time they think about providing 

a discount, they will have to remember that there are several million Medicare patients whose prices will automatically go down 

along with whatever discount they are offering. 

So I think that it would tend to disrupt prices in the private 

market significantly. 

Senator NELSON. Even though the price of the drugs would be 

cheaper for Medicare beneficiaries, and therefore, there would be a 

lot more drugs sold? 

Dr. CALFEE. Well, that is part of the mix, too. One of the more 

difficult things to predict is how much more you sell when that 

happens to prices. Gerry Anderson has a good point. There are 

some customers who right now don’t buy drugs that would be 

bought if there were some subsidies. 

Estimating the magnitude of that can be pretty tricky. In general, if everyone is in Medicare, their drugs are being paid for by 

the Government, yes, that is going to increase demand. If there is 

a mandatory discount from private sector prices, then I think it 

would tend to push those private sector prices up. 

95 

That is a little bit different from the last question you asked me 

which is what would happen to total sales and profits? That is a 

little bit trickier to answer. 

Senator NELSON. Dr. Anderson. 

Dr. ANDERSON. I think the problem here is that the private sector really can’t negotiate drug prices very well. The CBO says this. 

The GAO essentially says this. MedPAC has said this. Basically, 

they are not able to get good discounts. 

So, Jack Calfee is correct. I mean, they may have to pay a little 

higher prices, but it is because they are not very effective negotiators with the drug companies in getting prices. They can get 

some more rebates, but they don’t get lower prices. I think it is uniform that they just can’t get lower prices for brand-name drugs. 

They do very well for generics. They cannot do it for brands. 

Senator NELSON. I thought in Economics 101, the free marketplace, competition, supply and demand, I thought we learned that 

the more that you bought in bulk, huge purchases, the more negotiating power that you had. Therefore, you could bring the price 

down by purchasing a lot of things instead of a few things. 

With regard to the purchase of drugs for ultimately a population 

of some 44 million seniors through the Medicare drug program, although that is not how many are in it now, that is a lot of negotiating power, and the private sector marketplace could function. But 

that is not the way it is, and that is not the way it was designed 

in the prescription drug law of 2003. So, we are where we are. 

You all have illuminated this complicated issue enormously. I am 

very grateful to you. 

Thank you all for being public servants and especially sharing 

your expertise with us today. 

The hearing is adjourned. 

[Whereupon, at 4:46 p.m., the hearing was adjourned.] 

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MR. ANDERSON’S RESPONSES TO SENATOR MCCASKILL’S QUESTIONS

Question. Importation: According to a Congressional Budget Office (CBO) cost estimate from 2007 importation of prescription drugs would have saved the government 

itself more than $5 billion from 2009 to 2017 by allowing it to purchase cheaper 

drugs for Medicare and Medicaid recipients. In addition, the legislation would have 

increased federal revenues by about $5 billion by reducing the cost of private health 

insurance, which would end up increasing the share of employees’ salary that can 

be taxed. Should we not be pursuing this as an option? Can we afford not to do this? 

Are any of the pharmaceutical industry concerns related to safe reimportation 

legitmate? How do we do it safely and effectively? 

Answer. Drugs are made all over the world not just in the United States. The 

FDA already has a process to make sure that drugs made overseas are safe and effective. We should make sure that the drugs that are imported from places like Canada are the same drugs that are dispensed in the US already. 

We do not have any evidence that the drugs dispensed in Canada, the European 

Union or Australia and New Zealand have undergone any less rigorous testing or 

are any less safe than the drugs dispensed in the US. The only difference is that 

they are much less expensive. I discuss this in my written testimony. 

There are legitimate concerns that internet dispensing of drugs could be dangerous. This would apply to both internet dispensing in the US and in other countries. It is critical for the internet companies to demonstrate that they have appropriate safeguards in place to make sure that the correct drug in the correct dose 

is dispensed and that it is the drug is legitimate. Some of the recent robberies in 

the US of warehouses full of pharmaceuticals suggest that tighter surveillance in 

the US is also needed. 

Question. Role of Direct Marketing? (Only two countries—New Zealand and the 

U.S. allow direct to consumer drug marketing) Drug company spending on direct to 

consumer (DTC) advertising has increased twice as fast as spending on promotion 

to physicians or on the research and development of new drugs. Advertising is 

known to cause many consumers to go to their doctor and ask for the advertised 

brand name medication. One study of physicians found that in 5% of the cases when 

patients requested specific medications after seeing an advertisement, physicians 

prescribed the medication to accommodate the patients request despite thinking 

that another drug or treatment option would be more effective. Clearly, that is 

wasteful. I am trying to get a handle on how much this practice represents in unnecessary spending by the federal government. Is there a credible estimate that you 

know of regarding the cost to the taxpayer because of Direct To Consumer advertising? What measures would you suggest we take to try to crack down on this 

waste? 

Answer. A study published in the New England Journal of Medicine in 2007 entitled ‘‘A Decade of Direct-to-Consumer Advertising of Prescription Drugs’’ by Julie M. 

Donohue, Ph.D., Marisa Cevasco, B.A., and Meredith B. Rosenthal, Ph.D. found that 

real spending on direct-to-consumer advertising increased by 330% from 1996 to 

2005. 

I do not have an estimate of the cost to the taxpayer of direct to consumer advertising. From a research perspective this would be a very difficult number to develop 

since it would require estimating what would happen if direct to consumer advertising was not permitted—something where there is no data. 

Currently direct to consumer advertising for drugs is no different from direct to 

consumer advertising for hamburgers—both attempt to make you feel good about 

the product and do not attempt to convey any factual information about the product. 

A simple suggestion would be for them to be required to demonstrate the efficacy 

of their product instead of demonstrating that the person taking the drug is able 

to walk with their husband or to play with their grandchild. Insist that the information that is being conveyed be factual not inferential. 

MR. ANDERSON’S RESPONSES TO SENATOR FRANKEN’S QUESTIONS

Question. Dr. Anderson, like most Minnesotans, I’m baffled by the wide variation 

in drug prices between countries. It’s profoundly unfair that we continue to pay so 

much more for the same drugs. We invest billions of dollars in federal research and 

drug companies are making record profits. So it just doesn’t make sense that all of 

the excess costs are going to research and development of new drugs. Can you 

please discuss the key factors that result in such wide price variation between countries? 

Answer. Direct Negotiation. Most other countries have direct negotiation with the 

drug companies and they pay 1⁄3 to 1⁄2 what the US pays for the same drugs. It is 

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1GAO, Internet Pharmacies: Some Pose Safety Risks for Consumers, GAO–04–820 (Washington, D.C.: June 17, 2004). 

also well known that only 15–18 percent of the revenues that drug companies receive go for research and development. 

I have testified in the Senate Finance Committee and in the House Government 

Oversight Committee that we should have direct negotiation with the drug companies. There is no reason why the seniors in the US should be paying higher prices 

than other people in the US or in other countries. 

I would go a step further. I would have the federal government negotiate one price 

for all drug purchases. Currently the Medicare program has many different prices 

under Part D, the states have 50 different prices, the Public Health Service has a 

different price, the VA and DOD have different prices, and the prisons have their 

own prices. There is no reason why each government entity should be paying different prices when the funds all come from the taxpayers. 

Wide Variations in prices. We pay 2–3 times more for brand name drugs than 

other countries. The reason is quite clear. Other countries have direct negotiation 

with the drug companies and the US does not. The drug companies are able to negotiate better deals with multiple payors than with a single payor. 

We are the richest country in the world and as a result we may want to pay a 

higher amount than other countries. The amount should reflect our higher income 

and not our inability to negotiate a fair rate. If we as the richest country in the 

world can afford to pay more it would allow the drug companies to provide drugs 

to the poorest countries (e.g. Africa) at the marginal cost of producing the drugs. 

Question. Dr. Anderson recommends that Medicare increase transparency and 

begin to report to beneficiaries the amount the Part D plans actually paid. Can you 

please discuss changes we can make at the federal level to ensure that rebates accrue to consumers and not to middlemen? 

Answer. Middlemen. If the price transparency provisions that I recommended to 

the Senate Finance Committee were enacted it would be possible for the Secretary 

to protect the prices that individual drug companies negotiate with pharmacies and 

PBMs. What the Secretary would know is when a drug is much more expensive in 

Part D than it is in Canada or the VA. It would then ask the CEO of the company 

to explain the reasons for the price differential. If you had a top ten list (think 

David Letterman) of the most over priced drugs in Part D then it would be possible 

to put pressure on just these drugs. Since no drug company would want their drug 

on the top 10 list, the prices would drop in Part D. 

In that way you would not need to have middlemen getting the rebates instead 

of the consumers’. 

MR. DICKEN’S RESPONSES TO SENATOR MCCASKILL’S QUESTIONS

Question. Importation: According to a Congressional Budget Office (CBO) cost estimate from 2007 importation of prescription drugs would have saved the government itself more than $5 billion from 2009 to 2017 by allowing it to purchase cheaper drugs for Medicare and Medicaid recipients. In addition, the legislation would 

have increased federal revenues by about $5 billion by reducing the cost of private 

health insurance, which would end up increasing the share of employees’ salary that 

can be taxed. Should we not be pursuing this as an option? Can we afford not to 

do this? Are any of the pharmaceutical industry concerns related to safe reimportation legitimate? How do we do it safely and effectively? 

Answer. We have not conducted work directly on the issue of cost savings and 

safety issues related to importation of prescription drugs. However, in a 2004 report 

we identified several safety concerns with prescription drugs obtained through 

Internet pharmacies located outside the United States.1 Specifically, GAO identified 

problems associated with the handling, Food and Drug Administration approval status, and authenticity of samples received from such pharmacies. 

Question. Help in choosing the right plan: There are over 1,000 different plans 

nationwide. In Missouri, there are just under 50 Part D plans to choose from. We 

know that there are widespread differences in benefits offered, copayments, 

formularies, donut hole coverage and so on. This makes it nearly impossible for seniors to choose the plan that is most cost-effective for them and in turn, most costeffective for the government. In addition to frustration for seniors, these inefficiencies lead to significant wasteful spending. If seniors are not in the right plan, they 

enter into the donut hole faster, come out faster, and the taxpayers end up footing 

a higher bill. Ms. McKenna, I know that you suggest a grading system for plans, 

though I am not sure that such a system is detailed enough for individual seniors. 

102 

2The catastrophic coverage threshold is $4,550 in 2010. 

3 J. Hoadley, L. Summer, J. Thompson, E. Hargrave, and K. Merrill, ‘‘The Role of BeneficiaryCentered Assignment for Medicare Part D,’’ (special report prepared at the request of the Medicare Payment Advisory Commission), June 2007. 4The OECD includes 30 member countries that ‘‘share a commitment to democratic government and the market economy,’’ and OECD’s work includes developing publications and statistics on economic and social issues. 5GAO, Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other 

Countries and U.S. Private Payers and Federal Programs, GAO–07–358T (Washington, D.C.: 

Jan. 11, 2007). 

Question a. Are there other suggestions for what can be done to get beneficiaries 

in the best plan? 

Answer. We have not conducted work that focuses on what can be done to get 

beneficiaries in the best Medicare Part D plans. As you may know, Medicare offers 

a Prescription Drug Plan Finder (http://www.medicare.gov/mpdpf) as a tool to help 

beneficiaries determine which plan best suits their needs based on their unique circumstances. Among other features, the Plan Finder allows beneficiaries to input 

lists of specific drugs that they take, and provides information about plan options 

based on these specific lists of drugs. 

While this tool provides specific information on beneficiaries’ plan options, our 

work suggests that for certain beneficiaries—those taking high-cost drugs eligible 

for a specialty-tier—plan choice has only limited effects on out-of-pocket costs. 

Across plans with different cost-sharing structures, out-of-pocket costs for these 

beneficiaries vary initially but then become similar if beneficiaries’ out-of-pocket 

costs reach the catastrophic coverage threshold, which was $4,350 in 2009.2

Question b. Also, it is my understanding that low income beneficiaries are automatically enrolled in a plan by CMS. By law, the assignment of a plan is random. 

Do any of you have a handle on how much the government could be saving simply 

by placing those beneficiaries into a more cost-effective plan, particularly since these 

are the highest cost enrollees? 

Answer. We have not conducted work on the potential savings from placing lowincome subsidy beneficiaries into certain plans. However, in 2007, contractors produced a report for the Medicare Payment Advisory Commission that considers the 

potential impact on beneficiaries and the federal government of using random assignment for Part D plans compared to other options.3

Question. We have heard that the U.S. pays more than Canada, Europe and the 

rest of the world in general. 

a. What policies enable this and what policies could we enact to discourage this 

disparity? 

b. Have other countries seen the same increase in prices or is part of the rise in 

U.S. prices caused by cost shifting from other countries to the U.S.? 

Answer. A wide range of approaches is used by other countries, such as those affiliated with the Organization for Economic Co-operation and Development 

(OECD),4 to negotiate drug prices that include the following: 

Ceiling prices restrict market negotiations by setting maximum prices purchasers 

can pay for drugs. Ceiling prices allow purchasers to negotiate lower prices directly 

with drug manufacturers. 

Reference prices use local or international price comparisons of drugs classified 

in a group as therapeutically similar to determine a single or maximum price for 

all drugs in that group. 

Profit limits establish controls on drug manufacturers’ profits that require manufacturers to pay rebates or lower prices if profits exceed certain levels. 

Other factors—such as scope of coverage and national formularies, which are generally lists of preferred drugs—influence drug price negotiations.5 We have not examined the effects of applying policies used in other countries to negotiate drug 

prices to the United States. 

We have not conducted any recent work on drug pricing in other countries and 

cannot comment on the extent or causes of price increases in other countries. 

MR. DICKEN’S RESPONSES TO SENATOR FRANKEN’S QUESTIONS

Question. Mr. Dicken, GAO did a 2009 study for the late Senator Kennedy comparing copayments for specialty medicines in private Part D plans to the Federal 

Employee Health Benefit Plan. It’s my understanding that federal employees get 

specialty drugs for a copayment of $60 per month, while most Medicare Part D 

beneficiaries pay a percentage-based share of the cost. This can add up to hundreds, 

even a thousand dollars per month. As a member of Congress, I’m embarrassed that 

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6GAO, Federal Employees Health Benefits Program: Enrollee Cost Sharing for Selected Specialty Prescription Drugs, GAO–09–517R (Washington, D.C.: Apr. 30, 2009). 7GAO, Medicare Part D: Spending, Beneficiary Cost Sharing, and Cost-Containment Efforts 

for High-Cost Drugs Eligible for a Specialty Tier, GAO–10–242 (Washington, D.C.: Jan. 29, 

2010). 

we’re giving ourselves better coverage than our seniors get. Can you please comment 

on how this discrepancy occurs? 

Answer. We found that some plans participating in each program—the Federal 

Employees’ Health Benefits Program (FEHBP) and Medicare Part D—use varying 

cost-sharing requirements for specialty-tier eligible drugs, with some using a fixed 

copayment and others using a percentage-based coinsurance. Both programs provide 

consumers with information on the plans cost-sharing requirements to consider as 

they decide which plan to select during open enrollment. Also, while enrollees in 

Medicare Part D and FEHBP plans can be responsible for paying hundreds of dollars a month out-of-pocket, Part D plans have a catastrophic coverage threshold 

whereby Medicare covers most additional costs and nearly all FEHBP plans we 

studied have maximum out-of-pocket limits. However, for high-cost drugs such as 

those eligible for specialty tiers, the total annual out-of-pocket costs for enrollees in 

FEHBP depends on the plan chosen, whereas for Medicare Part D beneficiaries, the 

total annual out-of-pocket costs are generally similar regardless of the Part D plan 

chosen. 

Specifically, GAO’s 2009 correspondence to Senator Kennedy described the costsharing requirements and limits for specialty drugs covered by FEHBP plans.6 We 

found that enrollees in FEHBP plans were subject to varying cost-sharing requirements for the 18 specialty drugs we reviewed. Most FEHBP enrollees—more than 

6.6 million of the nearly 7.8 million enrollees in the plans we reviewed (86 percent)—were generally subject to copayments that limit enrollee costs to about $55 

on average for a 30-day supply of the drugs. Nearly 900,000 enrollees (11 percent) 

were subject to coinsurance for more than 1 of the 18 specialty drugs, which required the enrollees to pay on average nearly 31 percent of the cost of the drugs. 

These FEHBP enrollees’ coinsurance costs for specialty drugs were typically limited 

by per prescription dollar maximums or annual out-of-pocket limits, but depending 

on the plan, these varying requirements can result in a wide range of costs for enrollees for the same drug. For example, we estimate that under 3 different FEHBP 

plans with different cost-sharing requirements, an enrollee taking the multiple sclerosis drug Betaseron could pay $420 per year if subject to a copayment, $2,400 per 

year if subject to a coinsurance with a per-prescription dollar maximum, or $6,000 

per year if subject to a coinsurance with an annual out-of-pocket maximum. 

Similarly, in our recent study on beneficiary out-of-pocket costs for certain highcost drugs covered under Medicare Part D,7 we found that plans included in our 

sample of high-enrollment plans from various regions offered a variety of cost-sharing structures for the specialty tier-eligible drugs in our sample, including flat copayments as well as various percentage-based coinsurance rates. However, in contrast to the variation in annual out-of-pocket costs in FEHBP, our analysis showed 

that various cost-sharing structures—whether copayments or percentage-based coinsurance—utilized by Part D plans in 2006 through 2009 made very little difference 

in annual beneficiary out-of-pocket costs for beneficiaries using these drugs over an 

entire calendar year. Once Medicare beneficiaries reached the catastrophic coverage 

threshold of $4,350 in out-of-pocket costs in 2009 ($4,550 in 2010), they generally 

paid only 5 percent of the negotiated drug price for the remainder of the year regardless of the plan selected. 

Question. Mr. Dicken, in my opinion, a primary purpose of Medicare—and all insurance—is to protect Americans against unforeseen costs from an unexpected illness like cancer or multiple sclerosis. 

Do you think when seniors sign up for Medicare Part D that they truly understand the potential financial exposure they face if they get sick and end up needing 

a drug that’s in a specialty tier? 

Answer. We have not conducted work on beneficiaries’ level of understanding of 

specialty tier drug coverage under Medicare Part D. However, our testimony included information on the out-of-pocket costs that one group of beneficiaries—those 

taking high-cost drugs eligible for a specialty-tier—may be subject to paying. Across 

plans with different cost-sharing structures, out-of-pocket costs for these beneficiaries may vary initially but then become similar if beneficiaries reach the catastrophic coverage threshold, which occurred in 2009 when total drug costs reached 

$6,153.75, with beneficiary out-of-pocket drug costs accounting for $4,350 of that 

104 

8 In 2010, the catastrophic coverage threshold is reached when beneficiary out-of-pocket costs 

total $4,550. 

total.8 After the threshold is reached, most beneficiaries are responsible for 5 percent of any additional drug costs. For example, in 2009, beneficiaries responsible for 

full cost-sharing amounts who take drugs with a total negotiated price of $1,100 per 

month, or $13,200 per year, would face out-of-pocket costs of approximately $4,700, 

regardless of their plans’ cost-sharing structures. 

MR. HAMILTON’S RESPONSES TO SENATOR MCCASKILL’S QUESTIONS

Question. Importation: According to a Congressional Budget Office (CBO) cost estimate from 2007 importation of prescription drugs would have saved the government itself more than $5 billion from 2009 to 2017 by allowing it to purchase cheaper drugs for Medicare and Medicaid recipients. In addition, the legislation would 

have increased federal revenues by about $5 billion by reducing the cost of private 

health insurance, which would end up increasing the share of employees’ salary that 

can be taxed. Should we not be pursuing this as an option? Can we afford not to 

do this? Are any of the pharmaceutical industry concerns related to safe reimportation legitimate? How do we do it safely and effectively? 

Answer. The safe importation of prescription drugs is an option to help lower US 

drug costs. However, how and/or if it can be safely accomplished is a science issue 

and beyond my scope. 

Question. We have heard that the U.S. pays more than Canada, Europe and the 

rest of the world in general. 

a. What policies enable this and what policies could we enact to discourage this 

disparity? 

b. Have other countries seen the same increase in prices or is part of the rise in 

U.S. prices caused by cost shifting from other countries to the U.S.? 

Answer. 2) I have had only limited experience with foreign market drug pricing 

and have no data on their price changes. Consequently , I do not believe I’m in a 

position to appropriately answer this question. 

Question. Role of direct marketing? (Only two countries—New Zealand and the 

U.S. allow direct to consumer drug marketing) Drug company spending on direct to 

consumer (DTC) advertising has increased twice as fast as spending on promotion 

to physicians or on the research and development of new drugs. Advertising is 

known to cause many consumers to go to their doctor and ask for the advertised 

brand name medication. One study of physicians found that in 5% of the cases when 

patients requested specific medications after seeing an advertisement, physicians 

prescribed the medication to accommodate the patients request despite thinking 

that another drug or treatment option would be more effective. Clearly, that is 

wasteful. I am trying to get a handle on how much this practice represents in unnecessary spending by the federal government. Is there a credible estimate that you 

know of regarding the cost to the taxpayer because of Direct To Consumer advertising? What measures would you suggest we take to try to crack down on this 

waste? 

Answer. a) I am unaware of any estimate of the cost to the taxpayer because of 

Direct To Consumer Advertising. b) In a free market the cost would not be considered a waste. So, it’s a question of lese fair vs free market politics. 

Question. Comparative effectiveness research. Drug companies have to prove that 

their drugs are safe and are better than a sugar pill to get approval, but the drug 

companies rarely compare their drugs to other drugs. What role does comparative 

effectiveness research have in making sure that doctors not only are prescribing a 

drug that works, but the best drug? Would this type of research just improve outcomes or would it also cut spending? Should we include price when comparing drugs 

against each other? 

Answer. a) I’m not sure- it’s a science question. b) It could affect spending if it 

went beyond the science into pricing. c) If by ‘‘we’’ you mean the government, then 

we already do include pricing when comparing drugs against each other. Examples 

include Medicaid and the VA. Also, in the commercial market Pharmacy Benefit 

Managers (PBM’S ) include drug price in their formulary decisions. 

MR. HAMILTON’S RESPONSES TO SENATOR FRANKEN’S QUESTIONS

Question. Mr. Hamilton AARP Minnesota held a series of teletown halls on health 

reform during the past year. More than 92,000 Minnesota seniors participated and 

105 

the single most common question they brought up was—why doesn’t the federal government negotiate directly with pharmaceutical companies for Part D drugs? Can 

you please discuss the potential effects of direct negotiation on U.S. drug prices and 

what you think holds us back from adopting this policy? 

Answer. a) Direct negotiation by the government with drug manufacturers would 

result in a significant reduction in the cost of Part D drugs. b) I believe Mr.Calfee 

addressed the risk of such negotiations in saying he suspected the drug companies 

would respond by raising their commercial prices. 

Question. Mr. Hamilton, you mentioned that some price increases in Part D can 

be offset by rebates, but we’re hearing that these rebates aren’t getting back to consumers. Do we know if any portion of the rebates is getting back to beneficiaries? 

Answer. I do not know if any portion of rebates gets back to beneficiaries. It may 

(EG thru flat co pays), but it would be difficult to determine. 

Question. Mr. Hamilton, I’d like to ask you the same question—do you believe the 

increases were a response to the potential of federal health reform? If so, what can 

we do so drug companies don’t retaliate against federal reform with runaway drug 

pricing? 

Answer. a) I can’t read Pharma’s collective mind, but given the facts and the timing it certainly appears the unusual price increases were in anticipation of federal 

health reform. b) Nothing short of government intervention (regulation). 

MR. CALFEE’S RESPONSES TO SENATOR MCCASKILL’S QUESTIONS

Question. You repeatedly warned of the danger posed by pushing prices down in 

government plans, arguing that prices elsewhere, primarily in the private sector, 

would correspondingly increase to compensate for lost profits from the government 

programs. This assumes an inflexibility for pharmaceutical industry business model 

and profits and secondarily implies that the U.S. government should contribute the 

bulk of the pharmaceutical industry’s profit as opposed to other countries or the private sector. Do you have support that pharma’s business model is as inflexible as 

you imply and if it is inflexible is there any reason why the U.S. government should 

fill the role as the primary profit center for this industry? 

Answer. This question is about how drug prices in the private sector adjust to 

prices paid by the federal government. In my testimony, I had not intended to suggest that pharmaceutical firms increase private sector prices to compensate for 

lower Medicaid prices. Rather, the Medicare drug price rebate mechanism penalizes 

manufacturers if they aggressively discount their prices in the private sector. This 

tends to keep private sector prices higher than they would otherwise be. 

Question. We have heard that the U.S. pays more than Canada, Europe and the 

rest of the world in general. 

a. What policies enable this and what policies could we enact to discourage this 

disparity? 

b. Have other countries seen the same increase in prices or is part of the rise in 

U.S. prices caused by cost shifting from other countries to the U.S.? 

Answer. This question is about international price disparities between the U.S. 

and Canada, Europe, and other nations. I am unaware of policies that the U.S. 

could pursue to attack these disparities directly, because those disparities are largely the result of price controls that are constructed in each of those nations. U.S. authorities have in the past pointed out to those nations that their price controls tend 

to suppress innovation (such as in speeches by then FDA Commissioner Mark 

McClellan and in a 2004 report on international pharmaceutical prices). Such appeals seem not to have an effect. The reason seems to be that each nation is aware 

that because pharmaceutical revenues in their own nation comprise only a small 

percentage of international revenues, their own price controls have minimal impact 

on drug R&D (which is performed in search of worldwide profits rather than profits 

in a single nation). I myself would be glad to see new proposals to address the impact of international price controls on pharmaceutical R&D. 

This question also asks whether foreign prices have increased apace with U.S. 

prices or firms have been raising U.S. prices in order to shift costs. Past research 

on international prices has usually found that foreign prices increase less rapidly 

than U.S. prices and sometimes decline as controls become tighter. But U.S. price 

levels are almost certainly not the result of cost shifting, but are simply reflect attempts to maximize prices (which as a general rule do not involve cost shifting). 

Question. Comparative effectiveness research. Drug companies have to prove that 

their drugs are safe and are better than a sugar pill to get approval, but the drug 

companies rarely compare their drugs to other drugs. What role does comparative 

effectiveness research have in making sure that doctors not only are prescribing a 

106 

drug that works, but the best drug? Would this type of research just improve outcomes or would it also cut spending? Should we include price when comparing drugs 

against each other? 

Answer. This question asks about comparative effectiveness research on pharmaceuticals. First, CER could help assure that physicians prescribe the best drug for 

each patient, but there are limits to the ability of CER to achieve this result. It is 

very difficult to perform CER that provides valid results for current practice, which 

is continually changing as new drugs and new information about drugs become 

available. Also, CER often focuses on the average effects of competing drugs, whereas a drug that is equal or worse on average (in terms of efficacy, side-effects, or 

both) may still be better for some patients. Solid, timely CER could in principle both 

improve medical treatments and cut spending, but again, it is all too easy for CER 

to discourage the best treatments for some patients or to encourage cost-cutting that 

could work to the disadvantage of some patients. Finally, CER does not involve drug 

prices as opposed to clinical outcomes. Incorporating prices into CER would shift the 

research toward cost-effectiveness analysis, which again can be very useful but is 

fraught with difficulties. 

MR. CALFEE’S RESPONSES TO SENATOR FRANKEN’S QUESTIONS

Question. Mr. Calfee, in your testimony, you close by stating that the path forward to lower drug prices is unclear. I’d like to point out that from 1997 to 2007, 

retail prescription prices increased an average of 7 percent annually, much faster 

than the average inflation rate of 2.6%. During this same time, pharmaceutical companies increased their spending on direct-to-consumer advertising by an average of 

65 percent annually, spending $4.7 billion in 2007 alone. Of course, these companies 

have the right to advertise, but do you believe this is excessive? 

Answer. This question is about the relationship between drug prices and directto-consumer advertising. So far, econometric studies have failed to reveal a connection between DTC advertising and drug prices. This is not surprising. As the question points out, DTC advertising totaled $4.7 billion in 2007, which is only a few 

per cent of total drug spending of perhaps $200 billion. With the possible exception 

of a few heavily advertised brands, it is most unlikely that consumer advertising 

could have a significant impact on prices. Also, I do think that DTC advertising is 

excessive. Not only is it quite small relative to the size of the market, it usually 

focuses on therapeutic classes that are often under-used, partly because consumers 

need to be made aware of, or be reminded of certain medical conditions for which 

drug therapy is effective. 

Question. Mr. Calfee, last April, the Wall Street Journal ran a story entitled 

‘‘Drug Makers, Hospitals Raise Prices.’’ This article describes double digit increases 

compared to a year before on a dozen top-selling drugs. Then in November, a 

spokesperson from Merck was quoted in the New York Times stating that ‘‘Price adjustments for our products have no connection to health care reform.’’ Do you believe 

these increases were a response to potential federal health reform? 

Answer. This question asks whether drug prices were increased as ‘‘a response to 

potential federal health reform.’’ I have heard nothing from anyone in the industry 

on this topic. I would point out, however, that if manufacturers are already charging 

prices that are designed to make as much profit from innovative drugs as possible, 

there is probably little incentive to increase prices simply because a sweeping 

version of health care reform might be passed. Nonetheless, I have no way to plumb 

all the ways in which pharmaceutical firms might anticipate the highly varied effects that would come from comprehensive health care reform. 

Question. Mr. Calfee, I’m sure you’re aware that the federal government invests 

significant funds in R&D. National Institutes of Health received more than $30 billion in 2010 alone. Not every dollar goes for drug development but right now, Americans don’t receive any direct return on these investments. Instead, the research is 

used to develop new products in the private market that make billions of dollars 

in profits. Your testimony doesn’t mention the significant investment we make in 

R&D with taxpayer dollars. If you’re making the argument that programs like Medicaid underpay for drugs, it’s important to point out that most of these drugs 

wouldn’t exist without the initial federal investment. Would you agree? 

Answer. This question is about private vs public returns from taxpayer investment in medical research by the National Institutes of Health. Much of that research eventually undergirds research that leads directly to new drugs. I would emphasize, however, that almost never does NIH actually develop a new drug all the 

way to FDA approval. Hence private industry is responsible for transforming NIH 

research into useful therapies. It is true that the public receives no ‘‘direct return’’ 

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on NIH investments in the sense of manufacturer payments to the federal government. But research (including a book by Jena and Philipson published by the American Enterprise Institute) has demonstrated that the total benefits from pharmaceutical innovation are huge and that most of those benefits actually go to patients 

and payers rather than to the manufacturers. Nonetheless, I agree that NIH investment has been very important and valuable, not just to Americans but to residents 

of essentially every other nation. 

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