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74–858 2012

PRESCRIPTION DRUG PRICE INFLATION: ARE 

PRICES RISING TOO FAST? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 8, 2009 

Serial No. 111–87 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 


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COMMITTEE ON ENERGY AND COMMERCE 

HENRY A. WAXMAN, California, Chairman 

JOHN D. DINGELL, Michigan 

Chairman Emeritus 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

FRANK PALLONE, JR., New Jersey 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

Vice Chairman 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANE HARMAN, California 

TOM ALLEN, Maine 

JANICE D. SCHAKOWSKY, Illinois 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

ANTHONY D. WEINER, New York 

JIM MATHESON, Utah 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

JOHN BARROW, Georgia 

BARON P. HILL, Indiana 

DORIS O. MATSUI, California 

DONNA M. CHRISTENSEN, Virgin Islands 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

CHRISTOPHER S. MURPHY, Connecticut 

ZACHARY T. SPACE, Ohio 

JERRY MCNERNEY, California 

BETTY SUTTON, Ohio 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOE BARTON, Texas 

Ranking Member 

RALPH M. HALL, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

ROY BLUNT, Missouri 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO MACK, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE ROGERS, Michigan 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

PHIL GINGREY, Georgia 

STEVE SCALISE, Louisiana 

(II) 


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SUBCOMMITTEE ON HEALTH

FRANK PALLONE, JR., New Jersey, Chairman 

JOHN D. DINGELL, Michigan 

BART GORDON, Tennessee 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

JANICE D. SCHAKOWSKY, Illinois 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

ANTHONY D. WEINER, New York 

JIM MATHESON, Utah 

JANE HARMAN, California 

CHARLES A. GONZALEZ, Texas 

JOHN BARROW, Georgia 

DONNA M. CHRISTENSEN, Virgin Islands 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

CHRISTOPHER S. MURPHY, Connecticut 

ZACHARY T. SPACE, Ohio 

BETTY SUTTON, Ohio 

BRUCE L. BRALEY, Iowa 

NATHAN DEAL, Georgia, 

Ranking Member 

RALPH M. HALL, Texas 

JOHN B. SHADEGG, Arizona 

STEVE BUYER, Indiana 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO MACK, California 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 


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C O N T E N T S 

Page 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 1 

Hon. Nathan Deal, a Representative in Congress from the State of Georgia, 

opening statement ................................................................................................ 4 

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

California, opening statement ............................................................................. 5 

Prepared statement .......................................................................................... 7 

Hon. John Shimkus, a Representative in Congress from the State of Illinois, 

opening statement ................................................................................................ 13 

Hon. Anna G. Eshoo, a Representative in Congress from the State of California, opening statement .................................................................................... 14 

Prepared statement .......................................................................................... 16 

Hon. Steve Buyer, a Representative in Congress from the State of Indiana, 

opening statement ................................................................................................ 17 

Hon. Gene Green, a Representative in Congress from the State of Texas, 

opening statement ................................................................................................ 18 

Hon. Lois Capps, a Representative in Congress from the State of California, 

opening statement ................................................................................................ 19 

Hon. Michael C. Burgess, a Representative in Congress from the State of 

Texas, opening statement .................................................................................... 19 

Hon. Jane Harman, a Representative in Congress from the State of California, opening statement .................................................................................... 21 

Hon. Tim Murphy, a Representative in Congress from the Commonwealth 

of Pennsylvania, opening statement ................................................................... 21 

Hon. Janice D. Schakowsky, a Representative in Congress from the State 

of Illinois, opening statement .............................................................................. 22 

Hon. Betty Sutton, a Representative in Congress from the State of Ohio, 

opening statement ................................................................................................ 23 

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, prepared statement ...................................................................................... 129 

Hon. Kathy Castor, a Representative in Congress from the State of Florida, 

prepared statement .............................................................................................. 132 

Hon. Donna M. Christensen, a Representative in Congress from the Virgin 

Islands, prepared statement ................................................................................ 134 

Hon. Joe Barton, a Representative in Congress from the State of Texas, 

prepared statement .............................................................................................. 137 

WITNESSES

Stephen Schondelmeyer, Professor and Head, Department of Pharmaceutical 

Care and Health Systems, Director, Prime Institute, University of Minnesota .................................................................................................................... 25 

Prepared statement .......................................................................................... 28 

Richard I. Smith, Senior Vice President for Policy, Research, and Strategic 

Planning, Pharmaceutical Research and Manufacturing Association ............. 42 

Prepared statement .......................................................................................... 44 

Kathleen Stoll, Deputy Executive Director, Families USA .................................. 60 

Prepared statement .......................................................................................... 63 

John Vernon, Professor, Department of Health Policy and Management, University of North Carolina at Chapel Hill, Faculty Research Fellow, National 

Bureau of Economic Research ............................................................................. 69 

Prepared statement .......................................................................................... 72 

Bonnie Cramer, Chair, Board of Directors, AARP ................................................ 82 

Prepared statement .......................................................................................... 84 


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VI 

SUBMITTED MATERIAL

Financial records of AARP, submitted by Mr. Shimkus ....................................... 141 


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PRESCRIPTION DRUG PRICE INFLATION: ARE 

PRICES RISING TOO FAST? 

TUESDAY, DECEMBER 8, 2009 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HEALTH, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to call, at 9:39 a.m., in Room 

2123, Rayburn House Office Building, Hon. Frank Pallone, Jr., 

[chairman of the subcommittee] presiding. 

Present: Representatives Pallone, Dingell, Eshoo, Green, Capps, 

Schakowsky, Matheson, Harman, Barrow, Christensen, Castor, 

Sarbanes, Space, Sutton, Waxman (ex officio), Deal, Shimkus, 

Buyer, Pitts, Murphy of Pennsylvania, Burgess, and Gingrey. 

Also Present: Representative Welch. 

Staff Present: Brian Cohen, Senior Investigator and Policy Advisor; Jack Ebeler, Senior Advisor on Health Policy; Karen Lightfoot, 

Communications Director and Senior Policy Advisor; Earley Green, 

Chief Clerk; Bruce Wolpe, Senior Advisor; Bobby Clark, Policy Advisor; Virgil Miller, Professional Staff; Jeff Wease, Deputy Information Officer; Erika Smith, Professional Staff; Katie Campbell, Professional Staff; Sharon Davis, Chief Legislative Clerk; Allison Lorr, 

Special Assistant; Lindsay Vidal, Press Assistant; Elizabeth Letter, 

Special Assistant; Mitchell Smiley, Special Assistant; Justine 

Italiano, Staff Assistant; Matt Eisenberg, Staff Assistant; Ryan 

Long, Minority Chief Health Counsel; Clay Alspach, Minority 

Counsel; Brandon Clark, Minority Professional Staff; Melissa Bartlett, Minority Counsel; and Chad Grant, Minority Legislative Analyst. 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. The meeting of the subcommittee is called to 

order. And today we are having a hearing on ‘‘Prescription Drug 

Price Inflation: Are Drug Prices Rising Too Fast?’’ And I will first 

recognize myself for an opening statement. 

Every day in America, a life is saved, an illness is averted, or the 

effects of a disabling condition are mitigated thanks to the innovative medicines produced by the pharmaceutical industry. 

And I also think that it is important to mention the constructive 

role that the pharmaceutical industry and individual companies 

have played over the past few years amid various health care debates. The industry was an early and active proponent for the reVerDate Mar 15 2010 23:58 Oct 19, 2012 Jkt 074858 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A858.XXX A858

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authorization and strengthening of SCHIP, which we were finally 

able to achieve earlier this year. In addition, I want to recognize 

their efforts to ensure comprehensive health reform is enacted this 

year. While I know that we all have not seen eye to eye on every 

issue, I appreciate the fact that the industry acknowledged very 

early on that they have a stake in making sure health-care reform 

succeeds and they are willing to make a contribution towards paying for it. 

Unfortunately, for all the good the pharmaceutical and biotech 

industry do, it is often overlooked or eclipsed by reports of behavior 

designed to maximize profits at the expense of individual patients, 

employers, and American taxpayers. 

Indeed, according to a 2008 public opinion poll conducted by the 

Kaiser Family Foundation, negative views of the pharmaceutical 

industry appear to be driven by perceptions about the cost of prescription drugs and pharmaceutical company profits. The Kaiser 

poll shows that seven in 10 adults say pharmaceutical companies 

are too focused on profits and not enough on helping people. And 

nearly eight in 10, 79 percent, believe that high profits are a major 

factor in the price of prescription drugs, and the same proportion 

feels that drug prices are unreasonable. 

The poll further suggests that these opinions about prescription 

drug prices are driven by people’s real-life struggles paying for 

drugs. Four in 10 adults report some serious problem paying for 

medication, either that it is a serious problem for their family to 

pay for drugs they need or not filling a prescription or skipping 

doses because of cost. 

And new evidence suggests that prescription drug prices are increasing rapidly. Most recently, the New York Times reported on 

November 15th that drug prices had increased by approximately 9 

percent over the last year. And, by at least one analysis, it is the 

highest annual rate of inflation for drug prices since 1992. 

At the same time, general inflation, as measured by the Consumer Price Index, has fallen over the past year, which means 

that, while people are paying less for other types of goods and services, they are paying more for brand-name prescription drugs at a 

time when they are least able to afford to do so. And, as you know, 

millions of Americans are out of work, millions are losing their 

homes, millions are without health care coverage. So it should 

come as little surprise that Members of Congress would be alarmed 

about the idea of drug companies raising prices at a time when so 

many of our constituents are already unable to afford the medical 

care they need. 

Now, some researchers, including Dr. Schondelmeyer, who we 

are going to hear from today, has suggested there is a link between 

spikes in prescription drug prices and when there is legislation 

pending that impacts the pharmaceutical industry’s bottom line, 

such as the various health-care reform bills currently moving 

through Congress. 

I know that the pharmaceutical industry disagrees with this 

claim and has suggested that any increases in drug prices are a result of investments in research and developments that are necessary to keep new and innovative drugs moving through the pipeline. And I would be unfair if I didn’t point out the industry—you 


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know, that this is not, you know—how should I say it—one broad 

stroke. I mean, there are companies that are increasing prices, and 

there are others that are not. But, according to Dr. 

Schondelmeyer’s research, some drugs saw no increase, some increases were below the average, but other drug prices increased by 

almost 20 percent, such as Flomax, which appears excessive, in my 

opinion. 

Furthermore, these surveys on drug prices are unable to account 

for discounts and rebates provided by manufacturers to wholesalers 

or purchasers. Hence, there is a level of uncertainty that is inherent in these numbers, and that is why we are basically supportive 

of better price transparency. And when it comes to prescription 

drugs, I think that that is something that we really need, more 

transparency. And I have been advocating that for a long time. 

I think that better reporting and more transparency will help us 

make sure that drug prices are not rising arbitrarily or to maximize profits and that every American has access to affordable prescription drugs. And that is a goal that we all share. 

So we are here today to try to get to the bottom of this latest 

price increase. And we obviously have people that will be talking 

about some of the reports that have come out, and also from the 

industry. And so I want to thank our panel of witnesses in advance 

for being here today. 

I do have to mention, though, that I know there is some issue 

with regard to Dr. Schondelmeyer because we just received his testimony this morning at 9:30. And I am very upset by that because 

the rules actually provide that we have to have the testimony much 

sooner. I think it is 2 days’ notice. When we get it at the last 

minute—you know, it literally is the last minute—I know there are 

some Members here that are going to suggest that he shouldn’t testify at all. 

I was sort of inclined initially to say that, as well, because I 

haven’t had anybody that submitted their testimony so late. But I 

would ask—I guess it is my prerogative to make the decision, and 

I am going to ask him to speak this morning, only because a lot 

of this hearing came about because of his initial survey. And I 

think if we don’t have the opportunity to hear from him, the panel 

and the hearing this morning won’t be as productive. 

But I don’t want to sound like a teacher chastising a student or 

something, but it is a problem when we get the testimony this late. 

Mr. SHIMKUS. Would the chairman yield for 1 second? 

Mr. PALLONE. Yes. 

Mr. SHIMKUS. Just trying to understand the historical aspect of 

this, did this happen last year with another health care briefing 

from Dr. Schondelmeyer, where we didn’t get the briefing but all 

we got was a PowerPoint? 

Mr. PALLONE. You know, I am not sure. I know that—look, let’s 

be honest—and I don’t want to get into an argument with anybody, 

because I agree with you. Unfortunately, we are getting testimony 

late. Like, I know that one of your witnesses, I think we got it yesterday, which, you know, is not as bad as getting it at the last 

minute. But it is getting to be a pattern that, you know, we are 

getting some of this testimony a day earlier rather than 2 days. 

And so I think we need to be a little more—I don’t know what the 


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word is—tough on the witnesses and remind them that we need it, 

you know, 48 hours in advance. 

Mr. SHIMKUS. If the chairman would yield just for 1 more second. 

Mr. PALLONE. Sure. 

Mr. SHIMKUS. It is my understanding that last year in the Government Reform Committee the same thing happened. 

Mr. PALLONE. I am just told he hasn’t testified before. 

Mr. SHIMKUS. And so my issue is, it is a pattern now. It is not 

a one-time mistake. 

Mr. PALLONE. Well, not in his case. 

Mr. SHIMKUS. I am just making a point that it might be a pattern, and we ought to be a little bit more—— 

Mr. PALLONE. Well, he has not testified before so I don’t want to 

say that it is a pattern on his behalf. 

But I do want to mention that it is important for both Democrat 

and Republican witnesses to try to get the testimony in, not just 

even 24, but 48 hours. The rules provide for the 48. 

But, anyway, let me yield to our ranking member, Mr. Deal. 

OPENING STATEMENT OF HON. NATHAN DEAL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA 

Mr. DEAL. Thank you, Chairman Pallone. Thank you for holding 

this hearing on the cost of prescription drugs. 

If the subcommittee is intent on addressing the high cost of pharmaceuticals, I believe that approval of the follow-on biologic legislation, which fairly balances consumer access with strong incentives 

to innovate, is essential to achieving this goal. In 2007, global sales of these drugs reached $75 billion. Current 

estimates suggest that half of all drugs, both small- and large-molecule-based, will be biopharmaceutical’s best year, while statistics 

further indicate that spending on biologic drugs is expected to grow 

20 percent annually. 

It is very disappointing that this committee, during markup of 

health reform legislation earlier, fell short on its commitment to 

achieve this goal. Unfortunately, provisions which aim to truly encourage competition, reduce cost, and, most importantly, increase 

access to critical drugs that currently fall out of the reach of countless Americans every day were not included as a part of the bill, 

as Chairman Waxman and I both tried to get done. 

Instead of government price controls, which have a proven track 

record of declining research-and-development spending among 

those nations who have adopted it, appropriate incentives which 

spur research and development and enhance access to cutting-edge 

drugs is essential. As we all know, incentives to invest in R&D 

projects are highly dependent upon legislation this Congress puts 

into place. We must ensure appropriate provisions are put in place 

which continue to promote world-class pharmaceutical research 

and development in the fight for new cures here at home and 

abroad while ensuring continued access to these drugs by the 

American people. It is, indeed, a delicate balance. 

I also look forward to AARP’s testimony and appreciate the opportunity to discuss their decision to support H.R. 3962, particularly in light of significant cuts which are prescribed by the legislation within the Medicare program. I look forward to learning more 


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about the reasons that led them to endorse this health care bill, 

which, as Chairman Waxman and I would probably say, did not 

embrace some of the cost savings in the pharmaceutical area that 

perhaps it should have included. 

Again, thank you, Chairman Pallone, for holding the hearing 

today. I yield back my time. 

Mr. PALLONE. Thank you, Mr. Deal. 

Chairman Waxman. 

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. WAXMAN. Thank you, Mr. Chairman, for holding this hearing. 

This is an important hearing. We are in the process of reforming 

health care, and one of our goals in doing so should be to hold 

down costs. 

Well, our economy is in a slump. The Consumer Price Index has 

actually gone down. Yet, for pharmaceutical prices in the last year, 

there has been a 9 percent increase. I must say that, when it comes 

to prescription drugs and the drug industry, nothing surprises me 

anymore, but increases of this magnitude is really pretty shocking. 

Our Nation sees that when drug prices are raised by 9 percent 

or more over a year, that increases the out-of-pocket cost for drugs, 

it drives up insurance premiums, it increases the cost of the Medicare D program, means more and more citizens—some with insurance, some without—are forced to go without the drugs they need 

to remain healthy. 

And reports indicate that this problem is getting worse, not better. The drug price increases over the last year are the biggest we 

have seen in a very, very long time. It is hard to escape the conclusion that the industry is positioning itself—positioning its pricing 

for enactment of the new health reform legislation. They were met 

with great acclaim when they announced with the White House 

and the Senate that they were going to take an 80-percent reduction in their profits over the next 10 years, $80 billion. Well, a 9 

percent increase in prices over this last year comes to $20 billion 

that they are getting in just 1 year. So let us keep this in perspective. 

When Americans hear about these soaring drug prices, they are 

absolutely right to demand to know what Congress is doing about 

it. In the House, led by members of our committee, we are trying 

to tackle this problem. Last month, the House passed historic 

health-care reform legislation, and I am confident the Senate is 

going to follow our example in a very short period of time. 

In our legislation, we provided that health insurance, including 

drug coverage for 36 million citizens who would be otherwise without it, and we closed the Part D donut hole, meaning that seniors 

would no longer have to stop taking drugs when their coverage 

runs out. What we did in the pharmaceutical area is that these 

companies will not just get a blank check as we form our health 

care system. We tried to strike an important balance that put consumers and taxpayers first. 


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We require the drug industry to provide additional discounts for 

the Medicaid program. We end the multi-billion-dollar windfall 

that the industry received when dual-eligible enrollees were 

switched from Medicaid to Medicare Part D drug coverage. We are 

requiring that discounts be provided when the government pays for 

low-income people to get health care coverage. 

The House bill uses this money that would otherwise go to the 

drug companies to help millions of Americans afford health care 

coverage and to close the Part D donut hole. That is a good policy 

outcome. It is good for America, and it is the right prescription for 

PhRMA. 

The drug industry made over $50 billion in profits in 2008—$50 

billion in profits. Some of that went to increase their research and 

development. Most of it—or let’s put it this way—more of it went 

to marketing drugs than into R&D. 

So when we look at a drug price increase of 9 percent over the 

last year, it is the highest increase in recent memory. And as we 

try to climb out of our massive recession, as more and more Americans struggle with the loss of health care coverage and high insurance costs, everyone has to pay more costs for drugs. This is not 

right. We can’t afford it. 

The drug companies are playing a shell game when they tell us 

they are going to take reductions in government expenditure, yet 

they are going to get millions of new customers paying for drugs, 

and yet what we see is, at the same time, they are increasing their 

drug prices at a record rate. I hope this hearing will help us inform 

the people who are working on health care reform so that we don’t 

let them get away with this blank check. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Waxman follows:] 


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Mr. PALLONE. Thank you, Chairman Waxman. 

The gentleman from Illinois, Mr. Shimkus. 

OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS 

Mr. SHIMKUS. Thank you, Mr. Chairman. 

And I do appreciate the chairman of the full committee’s letter 

requesting a CBO analysis. I just wish we had that in hand prior 

to having this hearing, which bespeaks of the timing of this hearing for the purposes of whatever the majority wants to deem without having a proper analysis. 

Having said that, Medicare D has been one of the most successful Federal health care programs. Originally scored in first-year 

costs at $49 billion; it came in at $41 billion. Overall, since its inception, it is 40 percent under projected cost. Seniors have more 

choices. 

And it is a distinct difference in the direction that we are heading in 3962, where Medicare D incentivizes private insurers to provide access to prescription drugs so people can choose, and you let 

the market work, which is just the opposite of what we plan to do 

when we eventually move to a government takeover of health care 

in 3962. 

Every health care hearing that we are going to have is going to 

be, as the chairman of the full committee says, in the parameters 

of the health care bill that is moving through both chambers. And 

rightly it should be. So there will be a lot of great questions because of the calling of this hearing, and we look forward to discussing those. 

Let me end on just talking about comments made last week 

which was disparaged but has been proved correct by a paper 

called The Californian. Last week we had the breast cancer decision from 40 to 49. And a lot of us said, this will start the road 

down to the government making determinations based upon cost. 

And the headline here, ‘‘State Ends Subsidy for Mammograms to 

Low-Income Women Under 50.’’ And they also say, ‘‘The State’s decision, announced December 1st and effective January 1st, follows 

a controversial Federal recommendation last month that mammograms before the age of 50 are generally not needed. However, the 

private health care system has rejected the Federal task force recommendations.’’ 

So here you have the public health agency say, we are going to 

accept these to save costs; the private insurers are going to keep 

them, which is an incentive for us to stop disparaging private insurance and really be concerned about government-run. 

Here is what Dr. Klausen says. ‘‘What makes me really worried 

is that the California Department of Public Health wants to save 

money by taking away a cancer detection program,’’ Klausen said. 

‘‘That discriminates against a gender, also discriminates against an 

income level, and it also discriminates against how community clinics can practice medicine.’’ 

That is the road we are heading. I reject this path. It will be 

harmful to public health. And we will get a chance to ask questions 

of those people who are in the room, the closed-door meetings with 

the White House and other leaderships, on their role in H.R. 3962. 


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And I yield back my time. 

Mr. PALLONE. The gentlewoman from California, Ms. Eshoo. 

OPENING STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. ESHOO. Thank you, Mr. Chairman, for holding this very important and timely hearing today. 

Like most of my colleagues, I, too, am very concerned to see reports of artificially increased drug prices on the heels of a promise 

made by the drug manufacturers to decrease prices for consumers. 

Last month, the AARP released a study which found brand-name 

drugs increased by 9.3 percent, the highest drug inflation since 

2002. Just a few months earlier, a much-touted announcement by 

the White House and PhRMA promised $80 billion in savings on 

drug costs, most notably to help seniors who are struggling to pay 

for medications in the donut hole. 

At a time when everyone in the health care industry is being 

asked to put something on the table to contribute something to the 

reform effort, the drug companies were some of the most vocal in 

touting the, quote, ‘‘sacrifice’’ they were making for the cause of 

health-care reform. 

Last April, IMS predicted that drug sales might actually go 

down. But IMS Health, a consulting firm paid for by the drug companies to advise them, reported a significant increase in prices. 

I certainly understand the need to couple profits with innovation 

in order to promote science and encourage new therapies and treatments. I think that that is essential, not only to advance what we 

want to advance but that we retain an American position where we 

are first in the world, because our people benefit from it. But, as 

I understand it, the House PhRMA agreement called for reduced 

drug costs to support comprehensive health-care reform and not 

discounts from jacked-up prices. 

I know that we are going to be hearing from PhRMA, who I understand will testify that reports of rapidly increasing drug prices 

are false and that the increase was based solely on the listed price 

of drugs, not the discounted prices most Americans or the government pay. I am eager to hear their explanation and be able to report these explanations back to my constituents, if they are worthy 

of being reported, if they really hold something. 

I am also eager to hear from AARP, which fueled much of the 

drug pricing debate with their recently released report. As both an 

interest group for seniors and an insurance company, their report 

may have different implications. 

I would just like to add, too, that the gentleman from Georgia 

made some comments about biologics. And I know that he is not 

pleased with the outcome of what is in the bill. I do believe very, 

very firmly that by treating biologics in a new way, bringing them 

into biosimilars, that this will make biologics—move them into 

generics. And, thereby, more and more Americans will be able to 

not only afford them, but that that pathway is a very robust one, 

a smart way to go. 

I don’t want to lose this to other countries. I think that America 

is in a position today where it can ill-afford that. And, most frankVerDate Mar 15 2010 23:58 Oct 19, 2012 Jkt 074858 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 E:\HR\OC\A858.XXX A858

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ly, we have two major biologics companies today. We have to do 

this the right way so that this can reach patients. And it really represents, I think, the most hope in medicine. Because, as good as 

pharmaceutical drugs may be, they only treat symptoms, they don’t 

go to the cause of a disease. So biologics are really where the most 

hope lies. 

So I thank you again, Mr. Chairman, for holding this hearing. I 

look forward to the testimony, the important testimony of the witnesses. And I yield back. 

[The prepared statement of Ms. Eshoo follows:] 


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Mr. PALLONE. I thank the gentlewoman. 

The gentleman from Indiana, Mr. Buyer. 

OPENING STATEMENT OF HON. STEVE BUYER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA 

Mr. BUYER. I thank the chairman for the hearing today. 

And I don’t mind receiving input from anyone, at this point, because there is such great uncertainty out there, especially regarding your very aggressive health agenda. And it is an agenda that 

I think is on the verge to hurt the industry and which we are going 

to discuss here today, and there, in turn, hurting the health of 

America and to the world. 

I think it is important to look at what we know about drug prices 

and their relationship with regulations, such as price controls, 

which are supported by the majority. It is what is included in their 

health reform legislation that was passed by the House and is 

being debated by the Senate. 

What we ought to be doing is we ought to be looking at the effect 

of price controls. And we can look at the model that is by European 

countries between 1986 and 2004. During this time, these countries 

strengthened their price controls, and the controls had a devastating impact upon research-and-development spending. And all 

of that investment then began to shift to America. 

Before the strident price controls were implemented in the mid1980s, spending in Europe for research and development of the 

new life-saving drugs exceeded that of the United States by 24 percent. By 2004, spending in Europe on research and development of 

drugs trailed the United States by 15 percent. So what did this 

dramatic decline in research-and-development investment in Europe amount to? Well, they have 50 fewer new drugs approved in 

Europe and about 1,700 fewer scientists employed in Europe. 

Europe’s pharmaceutical industry research and development 

grew at merely one-half of the rate of that here in the United 

States. As economists John Vernon and Joseph Golec found, quote, 

‘‘Whereas European Union firms introduced about twice as many 

new medicines as U.S. firms between 1987 and 1991, they introduced about 20 percent fewer than U.S. firms between 2000 and 

2004.’’ 

So here we sit, with potential price controls that will be similar 

to Europe. I think America ought to pause—actually, I think America ought to wake up. Because there is a wave of socialism that is 

truly coming to the shores of America. And we better wake up. 

Now, all of us either have friends or someone or a family member 

that has a narrow disease. So when you think of types of narrow 

disease—adenoid cystic carcinoma, Alpers’ disease, Bell’s palsy, 

Dandy-Walker malformation, Hodgkin’s disease, sickle-cell disease, 

sudden infant death syndrome—there is a very long list. And so, 

what is the demand when someone has a narrow spectrum of a disease? Well, they want the pharmaceutical companies to find that 

drug that can help. 

Well, if it is very narrow and there is not any ability to have a 

profit, what is the incentive for industries to go? So government 

tries to provide the incentive. If we are going to wipe out and move 

to price controls and wipe out incentives in R&D, then many of 


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these disease groups, people are going to be left on the outside. And 

that is not how we define compassion for public health for America. 

I yield back. 

Mr. PALLONE. Thank you. 

The gentleman from Texas, Mr. Green. 

OPENING STATEMENT OF HON. GENE GREEN, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. GREEN. Mr. Chairman, thank you for having this hearing on 

prescription drug prices. 

We have seen many reports on the high cost and rising prices of 

prescription drugs. The most recent report released by AARP Policy 

Institute in November found that, between October 2008 and September 2009, the brand-name drug prices increased 9.3 percent, 

the highest drug inflation since 2002. Prices for specialty drugs 

used by Medicare beneficiaries increased even more, by 10.3 percent. Over the same time, prices for generic drugs declined by 8.7 

percent. The high cost of these prescription drugs has an impact on 

Medicare, due to the increased taxpayer expenditures and increased premiums. 

I am also concerned that every member of this committee has 

heard from seniors in their district who are enrolled in Medicare 

Part D who have fallen into the donut hole, which is a result of 

the Medicare Modernization Act of 2003. This forced Medicare Part 

D enrollees to pay 100 percent of drugs between $2,700 and $6,154. 

Each year, 4,400 seniors in our district hit the donut hole and are 

forced to pay their full drug costs despite having Part D drug coverage. 

Throughout the country, seniors pay thousands in out-of-pocket 

expenditures they are unprepared for with fixed incomes. The 

donut hole often causes seniors to choose between purchasing medication and food, which is not something they should ever have to 

do. This is not the kind of benefit seniors deserve, and it needs to 

be corrected by Congress. 

The House passed a health reform bill, H.R. 3962, which makes 

several major changes in prescription drug programs to ensure seniors and low-income individuals receive the prescription drug medication they need at an affordable cost. H.R. 3962 increases current 

Medicaid drug rebates that manufacturers pay to the government 

and closes a program loophole that prevent full rebate payments. 

It also ensures the drug prices for dual-eligible and other low-income enrollees are no higher for Medicare Part D than they are 

under Medicaid. H.R. 3962 reduces the donut hole by $500 immediately and institutes a 50 percent discount for brand-name drugs 

in the donut hole upon passage. It actually eliminates that donut 

hole over a period of years by 2019. 

The legislation gives the Secretary of HHS the ability to negotiate with pharmaceutical manufacturers to get the best deal possible for Medicare Part D beneficiaries. This allows the Secretary 

to obtain large discounts and rebates on drugs used by seniors, 

passing on that savings to Part D enrollees and to the taxpayers. 

The Senate is working on their health care bill right now, but 

their bill does not allow the Secretary to negotiate the lower Part 

D prices and does not create new Part D drug rebates and does not 


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close the Part D donut hole. If we want to make real health-care 

reforms, we must address the problems that exist in Medicare, particularly those that cost our seniors thousands of dollars each year. 

And, again, I want to thank the witnesses and appreciate them 

for appearing before our committee, Mr. Chairman. 

Mr. PALLONE. Thank you. 

The gentleman from Georgia, Mr. Gingrey. 

Dr. GINGREY. Mr. Chairman, I will waive my opening statement 

in the interest of having more time for questions. Thank you. 

Mr. PALLONE. Thank you. 

Our vice chair, the gentlewoman from California, Mrs. Capps. 

OPENING STATEMENT OF HON. LOIS CAPPS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mrs. CAPPS. Thank you, Chairman Pallone, for holding this hearing on such a timely and urgent situation. 

As we move forward with health-care reform efforts, we need to 

ensure that we aren’t just providing access to health care services 

in theory, but we need to actually make it affordable, both for individuals and for the government. With prescription drugs accounting for 10 percent of medical expenditures, it is imperative that we 

assure affordability for the people who rely on them. 

I am particularly concerned with the impact of rising drug costs 

on our seniors, who, for the most part, live on fixed incomes. I am 

sure all of our colleagues have heard from constituents who have 

literally had to decide each week between medication and groceries 

because the costs are so prohibitive; or other constituents who decide to take only half of their prescription, their dosage, because 

they can’t afford to pay for the entire amount. 

While there are assistance programs to help individuals pay for 

their medications, they aren’t always reliable, and they don’t always apply to the particular medication that the senior needs. And 

that is why it is so important that we have this hearing today to 

look into the possible reasons for the rapidly increasing costs of 

medication. 

I certainly understand that drug manufacturers must recoup the 

expensive costs of research and development. But, at the same 

time, isn’t it unconscionable for us to be watching as drug companies’ profits rise the way they are, while more and more of their 

patients with chronic disease lose their ability to afford life-saving 

medications? I look forward to hearing our witnesses’ thoughts on 

why these price increases are occurring and how we can address 

the costs as we move forward. 

And I yield back. Thank you. 

Mr. PALLONE. Thank you. 

The gentleman from Texas, Mr. Burgess. 

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Dr. BURGESS. Thank you, Mr. Chairman. 

I am sure if there are people watching this hearing this morning, 

they are wondering what in the world is the purpose of what we 

are doing here this morning. If it is to answer the question, ‘‘Are 


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prescription drug prices rising too fast?’’ then they probably have 

a couple of concerns. 

And the first is, why have we not waited until the report requested by Chairman Waxman from the General Accountability Office on this very question was received? We really can’t debate the 

proper increase in prices, what they should look like, until we know 

the facts—not the facts as reported by the New York Times or an 

advocacy group with a policy agenda, but that provided by an independent entity which has the responsibility of providing Congress 

with information. 

And the second concern is, why in the world did we not initiate 

this in the Subcommittee on Oversight and Investigations where 

we have subpoena power if necessary and can take testimony 

under oath? If the concern is that prices are being manipulated and 

causing harm to Americans on programs under this committee’s jurisdiction, then that would seem to be the natural place to hold 

that hearing. 

Maybe this is all about that monstrosity of a bill that we passed 

late in the night a couple of Saturdays ago. Again, it is just hard 

to know. But you do have to ask the question, where is the General 

Accountability Office, where is the Congressional Budget Office, 

where are the actuaries at the Center for Medicare and Medicaid 

Services that could make sense of some of this for us? None of 

those people are testifying today. Mr. Chairman, why is that? 

Now, I know some people look at drug prices and say, ‘‘All drug 

companies are evil, and they shouldn’t make a profit, and we need 

to take those away from them.’’ This government’s history, in the 

past year, of manipulating in the market is wrong on so many principles. I don’t think we should encourage that type of behavior in 

this committee today. 

But you know what we really don’t know? If this manipulation 

does exist, what part of it was fostered by those secret negotiations 

that occurred down at the White House in May and June? And why 

has this committee had absolutely no curiosity about what was 

going on in those secret negotiations in May and June? And why 

is it that so many of these things were stumbled upon in the 

workup of the legislation in this committee and on the Senate Finance Committee? Why is it that pharmacy prices can’t be 

changed? Why is it that the American Hospital Association has 

some of the things that it has brought to the table that are judged 

to be pretax? What other deals were struck? What deals with the 

AMA? What about AHIP? What about the Service Employees International Union? 

We know nothing about that because this committee has had no 

curiosity about what might have been happening down at the 

White House under the cloak of darkness. This was supposed to be 

a transparent process available to the American people on C–SPAN 

from start to finish. And we can’t get the most basic information 

about what was given up and what was given away during those 

secret negotiations in May or June. 

Now, we can also do a lot of stuff on Medicare Part D. I have 

to tell you that the fact that we decided in 2006 to work with the 

market rather than dictate to the market has been responsible for 

a significant amount of success in the Part D program. 


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But I suspect we will hear some of the same arguments that we 

have heard for years about why that program is not working, despite the fact that 90 percent of Americans aged 65 and over have 

access or have prescription drug coverage today compared to 75 

percent before we started in 2004 and that the satisfaction with 

that program is at an all-time high. I am not going to say that the 

program can’t be improved, but it has worked and it has exceeded 

expectations. And I think we need to be careful before we start tinkering around the edges with that program. 

Thank you, Mr. Chairman, for holding this hearing. And I yield 

back. 

Mr. PALLONE. Thank you. 

The gentlewoman from California, Ms. Harman. 

OPENING STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. HARMAN. Thank you, Mr. Chairman, for holding this hearing. 

Let me say to Dr. Burgess that I sat through the tens of hours 

of markups of the health care bill, and I heard people on our side 

complain fiercely about the so-called deal that the White House 

struck with PhRMA, the $80 billion deal. And I remember voting 

for parts of the health care bill that were reported by this committee that scuttled that deal and that required, for example, negotiations for better drug prices under Medicare Part D. So I think 

whatever it is that the White House did, I want to applaud this 

committee for looking independently at some of those deals. 

And I think the reason we are here today is because we are still 

enormously concerned about the escalation in drug prices. According to the AARP, the wholesale prices, not the retail prices, of 

brand-name drugs have risen by 9.3 percent in the last year, the 

highest annual increase since 1992. And this comes at a time when 

the Consumer Price Index has dropped by 1.3 percent. 

As we head into the holidays and people are strapped to buy anything for their families over the holidays, I think it is just unconscionable and immoral that a basic necessity of life, which is drugs, 

is having this unexplained escalation in prices. We already spend nearly $300 billion a year on prescription 

drugs. It is one of the fastest growing areas of health-care spending. And, frankly, since the very beginning, I have maintained that 

reducing the cost of prescription medications is the one reform that 

will have the biggest impact on people. 

So I am very glad that we are holding this hearing. And I just 

want to say to our witnesses and to others who are looking at this 

problem that consumers are watching, and right now what I think 

they are seeing is price gouging. 

I yield back. 

Mr. PALLONE. Thank you. 

The gentleman from Pennsylvania, Mr. Murphy. 

OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA 

Mr. MURPHY of Pennsylvania. Thank you, Mr. Chairman. 


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This is a hearing that we have long awaited, as with many other 

hearings of this type, to find out accurate information with regard 

to pharmaceutical companies and what they do. I am particularly 

concerned here about making sure that we are not having hearings 

on why drug companies are not inventing drugs to cure disease. 

That would be a sad state of affairs, indeed. 

Many of my constituents are senior citizens, and we know they 

struggle to pay their high medical bills. We know that we have had 

opportunities, sometimes squandered, with regard to how we could 

reduce medical bills by reducing costs of health care through preventative services, through making sure that we maintain disease 

management, by making sure we reduce waste in health care. 

However, one thing we don’t want to do is eliminate drugs that 

can help cure problems. After all, drugs that are not affordable 

offer little consolation, and a drug that is not invented offers little 

cure. And, as a combined thing, we have to make sure this committee does not stand in the way of coming up with those cures. 

It is easy to go after companies that make money—oil companies, 

pharmaceutical companies, anybody else who makes a profit—as a 

for-profit or nonprofit company and say that they should not be 

making that kind of money if the cost is passed on to the consumer. 

I understand, and we need to be sensitive to that area and make 

sure that these prices of any item is not inflated to the point that 

people cannot afford them. 

However, it is also important that this committee, nor this Congress, nor this country stands in the way of coming up with these 

cures to treat diseases. There was a—certainly, other things that 

we have done here. We have looked after the consumers. We want 

to make sure we continue to look after the consumers and making 

sure that these are things that they have. 

Generic drugs also are a critical function. They have grown massively in their use. They provide some good choices for people. And 

we need to continue to support generic drug use. However, they are 

not involved in the research-and-development sector, and we have 

to make sure that the research and development continues on. 

Congress funds much of that through NIH, through NIMH, 

through a lot of studies that take place, and we need to continue 

to do that, as well. And somehow we have to look at how combining 

these efforts to fund research and development, to fund all levels 

of research continue on so that this country leads the way in coming up with ways that we can find affordable prescription drugs. 

And, to that end, I am looking forward to hearing the testimony 

of the panelists here and seeing if they can offer us some solutions 

that is based upon how we can maintain this search for cures as 

well as search for affordable costs. 

I yield back. 

Mr. PALLONE. Thank you. 

The gentlewoman from Illinois, Ms. Schakowsky. 

OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS 

Ms. SCHAKOWSKY. Thank you, Chairman Pallone. I appreciate 

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tion drug costs are rising exponentially at a time when millions of 

Americans are struggling to make ends meet. 

I assure you my constituents applaud the fact that we are having 

this hearing today. A recent AARP survey of Illinois seniors confirmed the concerns that I hear from my constituents every single 

day. Sixty-three percent of AARP members in Illinois said they 

were concerned about affording their prescription drugs. Close to 

20 percent reported having to cut back on necessities to pay for 

prescriptions. Twenty-one percent reported not filling or delaying a 

filled prescription because they simply couldn’t afford it. And one 

in five said they took less than the prescribed amount to make 

their medicines last longer. 

Facing a severe budget deficit, our State took the bold step of expanding its prescription drug program, called Illinois Cares Rx, designed to benefit seniors and people with disabilities. When asked 

about the reason for the expansion of the Illinois—when asked for 

a reason, we asked Barry Maram, who is head of the Illinois 

Health Care and Family Services Division, and he said, quote, ‘‘The 

cost of prescription drugs has escalated to the point of being 

unaffordable for many of the people who rely on them most, especially seniors and people with disabilities. No one should have to 

go without medication that keeps them healthy,’’ unquote. 

The cost of brand-name prescription drugs are rising at a pace 

that far exceeds price increases for other consumer products. My 

constituents, both as consumers and as taxpayers, want to know 

whether the pharmaceutical industry is preparing for health-care 

reform by trying to squeeze every bit of profit they can now. 

Health consumers are desperate for health-care reform, and 

there are many provisions in H.R. 3962 that would lower drug 

prices, including the language that I had the honor of offering to 

this committee to eliminate the ban on Medicare negotiating for 

drug prices. But they can’t afford to have the drug industry use the 

time between now and the implementation to artificially raise 

prices and profit at their expense. 

Again, I thank you, Mr. Chairman. And I yield back. 

Mr. PALLONE. I thank the gentlewoman. 

Next is the gentlewoman from Ohio, Ms. Sutton. 

OPENING STATEMENT OF HON. BETTY SUTTON, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO 

Ms. SUTTON. Thank you, Mr. Chairman. And I appreciate you 

holding this hearing today. 

I would like to be able to say that I am shocked that we are here 

talking about this, but, sadly, I am not. Americans pay the highest 

drug prices in the world. We pay between 35 percent and 55 percent higher than people in other developed countries. And we have 

been paying these exorbitant prices for a long time. Drug prices account for 10 percent of all health-care spending. 

Over the past year, we have been working hard in this committee and in Congress to make health care more affordable for 

families, businesses, and individuals. And the ‘‘Affordable Health 

Care for America Act’’ health care bill contains a number of initiatives aimed at curbing the out-of-control drug prices for America’s 

families and seniors. 


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And yet, during this period, drug companies increased prices by 

over 9 percent at a time when inflation was negative. Increased 

drug prices hurt us all. They hurt older Americans on fixed incomes, who saw their drug bills increase by $550 last year. They 

hurt people who have insurance and who now have higher co-pays. 

They hurt taxpayers and the government, who are now paying 

higher drug prices. And, more than anyone else, they hurt the uninsured, who do not have anyone to negotiate on their behalf. 

There is something wrong when Americans are paying recordhigh drug prices and drug companies are reporting such high profits. The CEO salaries at some of the largest drug makers are evidence enough that something is seriously wrong. At Abbott Laboratories, the CEO made over $28 million last year. At Merck, the 

CEO made over $25 million. And at Pfizer, the CEO made over $15 

million. 

And it does not end there. Drug companies often claim that they 

must charge higher prices in order to fund research and development for new drugs. But the truth is, drug companies spend more 

on advertising than they do on R&D. It is time for some answers. 

It is time for the drug companies to explain why they are raising 

prices, especially right now. 

And I yield back. 

Mr. PALLONE. Thank you. 

The gentleman from Pennsylvania, Mr. Pitts, waives. 

The gentleman from Georgia, Mr. Barrow. 

Mr. BARROW. Thank you, Mr. Chairman. I will waive. 

Mr. PALLONE. Thank you. 

I think that concludes our opening statements from the Members, so we will now turn to our witnesses. We have just one panel 

today, and I would ask the panel to come forward at this time. 

Welcome. And thank you for being here today. 

Let me just introduce each of you. Starting on my left is Professor Stephen Schondelmeyer, who is professor and head of the 

Department of Pharmaceutical Care and Health Systems and director of the PRIME Institute at the University of Minnesota. Second 

is Mr. Rick Smith, who is senior vice president for policy, research, 

and strategic planning at PhRMA, which is the Pharmaceutical Research and Manufacturing Association. And then we have Kathleen 

Stoll, who is deputy executive director of Families USA. And Dr. 

John Vernon, who is a professor, Department of Health Policy and 

Management, at the University of North Carolina at Chapel Hill, 

and he is a faculty research fellow with the National Bureau of 

Economic Research. And finally is Ms. Bonnie Cramer, who is 

Chair of the Board of Directors of AARP. 

Thank you all for being here today. We have 5-minute opening 

statements. They become part of the record. And you may, of 

course, with our discretion, submit additional statements in writing. And you may get some additional questions after the hearing, 

too, to respond to in writing. 

And I will start with Dr. Schondelmeyer. 


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STATEMENTS OF STEPHEN SCHONDELMEYER, PROFESSOR 

AND HEAD, DEPARTMENT OF PHARMACEUTICAL CARE AND 

HEALTH SYSTEMS, DIRECTOR, PRIME INSTITUTE, UNIVERSITY OF MINNESOTA; RICHARD I. SMITH, SENIOR VICE 

PRESIDENT FOR POLICY, RESEARCH, AND STRATEGIC PLANNING, PHARMACEUTICAL RESEARCH AND MANUFACTURING 

ASSOCIATION; KATHLEEN STOLL, DEPUTY EXECUTIVE DIRECTOR, FAMILIES USA; JOHN VERNON, PROFESSOR, DEPARTMENT OF HEALTH POLICY AND MANAGEMENT, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL, FACULTY 

RESEARCH FELLOW, NATIONAL BUREAU OF ECONOMIC RESEARCH; BONNIE CRAMER, CHAIR, BOARD OF DIRECTORS, 

AARP 

STATEMENT OF STEPHEN SCHONDELMEYER 

Mr. SCHONDELMEYER. Thank you, Mr. Chairman. 

And my apologies for being late with my testimony. I was rather 

pressed with time and short notice on this particular hearing. 

I am here to speak on my own behalf as a researcher and one 

who has studied this marketplace for more than 30 years. I am not 

here representing AARP or even the University of Minnesota other 

than the fact that I am a professor there and that is where I do 

my research. 

And, also, let me comment that the Medicare Part D drug program has expanded coverage for prescription drugs for people who 

would not otherwise have had such coverage, and it has provided 

many benefits, and we have made some progress in that area. 

Realizing that drugs and drug prices and drug expenditures were 

an issue, the AARP and others, such as myself, researchers in the 

marketplace, determined that we need to, kind of, follow the advice, for example, of President Reagan when he said, with respect 

to nuclear disarmament, ‘‘Trust and verify.’’ One, let’s trust that 

there is a reason for the price changes, but let’s track them and 

see what they are and report that and reflect those price changes 

in the marketplace. And so, individuals at the AARP Public Policy 

Institute had an interest in tracking drug prices, and I had been 

doing that for a number of years in the marketplace, and we decided to get together and collaborate. 

That collaboration has led to a series of studies of drug prices 

over the last 5 or 6 years with AARP, one of which was the study 

that got reported in the New York Times back about a month ago. 

The details of that study and how we conduct our reports can be 

found in the reports that are available on AARP’s Web site. And 

so the detailed methodology, I would refer you to those reports 

rather than take time today to go through them, but I would be 

happy to answer any questions. 

Just to put it in perspective, though, we used actual Medicare 

Part D prescription data and identified the most frequently prescribed, the highest expenditure drugs, and the drugs that accounted for the most days of therapy. And, with 548 individual 

drug products in our market basket, we were able to account for 

over 81 percent of all prescription expenditures under Medicare 

Part D, over 79 percent of the prescriptions dispensed, and over 91 

percent of the days of therapy. So this market basket represents 


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virtually all of the Medicare Part D market with the exception of 

a very small set. 

The data that we use is a price called the wholesale acquisition 

price. And let me remind you that wholesale acquisition price is a 

price that is set by the manufacturer and reported to the price 

databases such as Blue Book, Red Book, or Medispan, and these 

prices are the manufacturers’ set price. On the one hand, even the 

wholesale acquisition cost is, in a sense, a type of a list price, but 

this list price very directly affects the price that is paid for prescription drugs at the retail level for virtually all third-party programs in the U.S., including the Medicare Part D plan which is in 

the private market as well. 

So let’s get down to the meat. What has the trend been for prescription drug prices in the past year? And here we are comparing 

prices from October of 2008 up through September of 2009, so I am 

talking about annualized prices, a 12-month period. And we use a 

rolling average which actually levels out and actually pulls down, 

in some cases, the price increase that is reported. 

Brand-name drug prices—that is, largely patented single-source 

drugs—increased on average from this Medicare market basket 9.3 

percent in the 12 months ending in September 2009. That 2009 increase of 9.3 percent was the highest that we have seen in at least 

7 years prior to this for that same market basket of drugs. The previous years, we saw 5.3 to 8.7 percent increases, nothing to brag 

about, but now we are up to 9.3 percent. 

The average cost of just one brand-name medication if a patient 

is taking it on a chronic basis would be over $2,000. And this 9.3 

percent increase then means that the individual taking just one 

chronic medication experienced a $200 increase in the cost of that 

medication last year. The average elderly person is on two to three 

medications, so they would have experienced a $400 to $600 increase in expense. 

Ninety-six percent of the brand-name drugs that we tracked experienced a price increase. None had a price decrease. 

The annual price increases of individual brand drugs that were 

notable—and there were many, and I will only give a few examples: Ambien CR, a heavily advertised drug, increased 20.8 percent; 

Aricept, an anti-dementia drug with generic competition, increased 

17.2 percent; Zetia, a drug with a questionable value and efficacy, 

increased 14.3 percent; Nexium, a heavily advertised drug with a 

patent until 2020, increased 7.1 percent. 

That is brand-name drugs. We also pulled out specialty drugs. 

These are often the drugs you are talking about in terms of 

biologicals or biosimilars. Not all of them are, but the vast majority 

of specialty drugs are biologicals. The biologicals and specialty 

drugs experienced a 10.3 percent average increase in 2009. And 

there, we can look—for example, the drug Betaseron, used for multiple sclerosis, had an increase of 28.2 percent. 

There were five drugs—actually, four drugs and five different 

presentations of those drugs in our market basket. All five of the 

multiple sclerosis drugs increased more than 17 percent, ranging 

from 17.5 up to 28.2 percent increase in price. There were 12 cancer drugs in our specialty database. They ranged from a low of 4.9 


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percent up to 20.8 percent. And, again, remember, inflation overall 

was negative last year. 

The bright spot is we also tracked generic drugs, and generic 

drugs actually went down 8.7 percent. This is one of the few—— 

Mr. PALLONE. I am going to ask you to summarize because you 

are, like, a minute and a half over. 

Mr. SCHONDELMEYER. OK, I will. 

Generic drugs are one of the few sectors that truly has a marketplace and has economic competition, and generics have continually 

gone down in price. The question isn’t what do we use to measure 

price inflation, the Consumer Price Index for Rx drugs or the 

AARP index. Each of them provides information that is unique and 

different. Our index was created to show the difference between 

brand names and specialty and generic, not just the aggregate 

index. And my full report—and I would be glad to answer in questions the role that rebates and discounts—that other methodological issues have in how we viewed this. 

The bottom line, though, is the average senior last year got a 

zero percent cost-of-living increase for Social Security income. 

They experienced an 11 percent increase in the premiums they 

had to pay for their Part D plans. That is for the drug benefit plan. 

They also face a 9.3 percent for brand name and 10.3 percent increase for specialty drugs. The only bright spot there is the 8.7 decrease in generic drug prices. 

These prices are real. They are felt by your constituents. 

Mr. PALLONE. Thank you. 

[The prepared statement of Mr. Schondelmeyer follows:] 


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Mr. PALLONE. Mr. Smith. 

STATEMENT OF RICK SMITH 

Mr. SMITH. Thank you, Mr. Chairman, Ranking Member Deal, 

members of the committee; thanks for the invitation to testify 

today. 

CBO reports that the pharmaceutical research sector is one of 

the most research-intensive industries in the United States. Companies’ investment in discovering new medicines is yielding results. 

Also, according to CBO, many examples exist of major therapeutic 

gains achieved by the industry in recent years. The rapid increases 

that have been observed in R&D spending have been accompanied 

by major therapeutic gains. Extensive research also reports that 

medicines often reduce spending on other health care services. 

The committee requested that I provide information on prescription drug pricing. As a trade association, PhRMA maintains a strict 

antitrust compliance policy. We can neither obtain nor discuss our 

members’ proprietary information related to prices, negotiations, or 

discount strategies. My testimony, therefore, reflects only aggregate market data and publicly available information. 

Recent government reports demonstrate that prescription drug 

cost growth has slowed dramatically. Findings about drug costs in 

the government’s most recent national health expenditures data 

are summed up in the CMS report’s title, national Health Spending 

in 2007: Slower Drug Spending Contributes to Lowest Rate of 

Overall Growth Since 1998. 

According to CMS, prescription drug cost growth in 2007 was 4.9 

percent, the lowest rate since 1963, and slower than health care 

overall. 2007 was not a 1-year blip; between 2003 and 2007, the average annual growth rate for prescription medicines dropped by 

half compared to the 1998 to 2002 period, and CMS’s most recent 

10-year projection reduced expected growth in prescription drug 

spending by $515 billion, or 14 percent, compared to 3 percent for 

the rest of health care. Likewise, CBO reports, from 2004 to 2007 

drug expenditures grew by an average of just 3.2 percent per year, 

slightly less than the rate of growth in overall health care spending. 

Since 1964, IMS Health has found that the U.S. Market grew by 

less than 5 percent only twice—2007 and 2008—and it now projects 

that growth will remain at historically low 4.5 to 5.5 percent in 

2009, and will be 5 percent or less in each of the next 5 years. 

At the same time the drug cost growth has slowed sharply; reports like those issued by AARP reach conclusions that conflict 

with government data and is skewed toward finding high price 

growth. These reports exaggerate drug price trends by failing to reflect the way public policy and the prescription drug market function. Our system is designed to fund the next generation of medical 

advances through innovator drugs that have a limited time on the 

market before going generic and to achieve cost savings through 

the high use of generics. Large, powerful payers use a variety of 

tools such as tiered formularies to negotiate lower brand prices 

while driving high use of generics, which now account for about 70 

percent of all prescriptions. 


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We don’t believe that each tool used by a purchaser always yields 

the best possible outcome, and we are encouraged by forward-looking purchasers who are looking at alternatives that make better 

use of medicines to improve care and control costs. Nonetheless, 

under the current system, drug costs as a whole are growing slowly, not fast, and consumers use drugs that were once innovator 

molecules as generics in large volume for many years with little or 

no return to the innovator. 

The importance of understanding how the market operates when 

interpreting pricing data is evident in AARP’s most recent report. 

Eight of the drugs on AARP’s list of the top 25 brand drugs are 

sold as generics. These drugs are counted in AARP’s brand price 

calculation as though patients continue to use them at brand 

prices, even though brand drugs typically lose nearly all of their 

sales after going generic. 

In one example, for a statin, 99 percent of the utilization for that 

statin on AARP’S list of top-used brand drugs is now generic, and 

the cost per day of therapy has dropped by 58 percent over 3 years, 

not reflected in the AARP report. 

The Federal Government CPI data on prescription medicines includes a market basket of brand and generics that reflects what 

consumers actually buy. In the 3 years ended October, 2009, drug 

prices rose by an average of 2.3 percent per year, compared to 3.8 

percent for all medical care. For the most recent year, the government’s measure of drug price growth was 2.7 percent. 

The implicit message of reports on brand prices seems to be that 

the pharmaceutical research companies stand to be in a uniquely 

favorably position. In fact, the sector is currently characterized by 

slow growth, rapid substitution of generics for brand medicines, a 

projected $90 billion in sales facing generic entry over the next 5 

years, and the exceptional challenges inherent in discovering new 

medicines that safely and effectively treat disease. 

Through October of this year, 58,000 job cuts have been announced in the industry, on top of cuts in 2007 and 2008. Nonetheless, there is reason for optimism that new medicines will continue 

to improve medical care in the future. Investment in pursuing 

these objectives accounted for by the 10 percent of health spending 

going to medicines is repaid to society in longer, healthier, more 

productive lives. 

Mr. Chairman, in conclusion, I will note that the National Economic Council recently published a document titled Strategy for 

American Innovation: Driving Towards Sustainable Growth and 

Quality Jobs, which identifies new treatments such as smart 

anticancer therapeutics and personalized medicine as among the 

21st century’s grand challenges. Achieving these challenges is 

viewed as important to improving the quality of life and establishing the foundation for industries and jobs of the future. The biopharmaceutical research sector looks forward to its role in bringing 

these goals to fruition. 

Again, Mr. Chairman, Ranking Member Deal, thank you for the 

invitation to testify. 

Mr. PALLONE. Thank you, Mr. Smith. 

[The prepared statement of Mr. Smith follows:] 


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Mr. PALLONE. Ms. Stoll. 

STATEMENT OF KATHLEEN STOLL 

Ms. STOLL. Thank you, Chairman, and thank you, Ranking Member Deal, members of the subcommittee. My voice isn’t quite as 

loud as the previous gentleman. 

I think we have heard a lot of numbers. I am going to actually 

give us a little pause from the numbers. I have got a few stats, but 

I also want to paint a picture of what it means to have rising prescription drug spending and prices for consumers. Let me just give 

you a few numbers, but let me mix in some stories. 

Increasing access to affordable prescription drug coverage is a 

top issue for Families USA. We have seen prescription drug spending by consumers more than double in the last 10 years. 

Now, it is fair to say that that spending is driven by more than 

just price increases. People are using more drugs, and in many 

cases that is a good thing. Prescription drug use has increased 72 

percent while the population is only growing by 11 percent. That 

is a pretty good business proposition, I think. 

Utilization has also changed. That means the kinds of drugs people take has changed. And some of the drugs, the new drugs on the 

market, the biologics, are more expensive. That is not necessarily 

a bad thing because many of them are real breakthrough drugs. 

But we do see statistics that show that spending on biologic drugs 

is growing nearly twice as quickly as other traditional chemical 

drugs. 

And the third element of why consumers are spending more on 

drugs—or are trying to spend more on drugs—is the cost of prescription drugs, and that is what this hearing is about; and drugs 

are becoming more expensive. 

We can go back and forth with stats. I think we should be careful 

that we understand that reduction in the rate of growth still means 

you have a rate of growth. What we have seen is that between 

1997 and 2007, retail drug prices, which is what counts for consumers, have increased an average of about 6.9 percent a year. 

That is about 21⁄2 times faster than general consumer inflation. It 

seems like that trend might be accelerating; it is really hard to say, 

and I leave that to Steve. 

So what does this mean for consumers? If you look at uninsured 

consumers, uninsured adults, half report that they don’t get their 

prescription drugs filled. They don’t get their prescriptions filled 

and don’t seek needed refills. And I pause here now to tell you a 

story, and I’m not going to tell you a story of a dramatic disease— 

perhaps a rare disease with a dramatic cure. 

Let me just tell you about a single mom that came to our attention. She has a severe problem with migraines. They are debilitating. Her vision is impaired by them. And she is really left unable to function. And because of her migraines, she misses many 

days of work and many days with her son. 

She doesn’t have insurance. She does work full time. And she finally went to a headache specialist and they went through a couple 

of different drugs. He had some samples. After three or four, they 

found one that works. It is actually like a miracle drug for her. So 

we do thank the pharmaceutical industry for this breakthrough 


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drug. I am not going to name it. The problem is that this brand 

name drug that provides her tremendous relief for debilitation migraines is very, very expensive. So you know where the story is 

going. 

She can get the prescription filled. She gets six at a time. And 

it really takes hundreds of dollars to fill this prescription for six 

pills. So what she has told us is that she saves her pills and if she 

gets a real severe migraine, her doctor said, Take it right away, 

don’t wait; but she holds on to those pills because they are so expensive. And she will go ahead and have a migraine because she 

doesn’t take it early when she should. 

The end of the story is what she shared with me, which is she 

had one pill left 1 month, and she knew it was very expensive, she 

wouldn’t be able to replace it, and her son pays the trumpet and 

he had a recital coming. So she held on to that pill, went through 

three severe migraines, missed time at work, missed paychecks, in 

order to be able to take that pill on the day of the son’s recital. She 

ended up not having a headache that day, but she wanted the insurance. 

So that is what we are dealing with at the consumer level. If we 

could bring down the name of that brand drug, it would mean a 

tremendous difference for this woman who is uninsured. 

She’s uninsured. Many Americans who have health insurance are 

still unable to afford prescription drugs. You all know that as premiums go up, people are buying plans with higher deductibles, 

higher copays. They may have special deductibles and copays just 

for prescription drugs. So they end up underinsured when it comes 

to prescription drug coverage. They, too, make difficult decisions. 

They paid for coverage; because they are underinsured or may not 

have prescription drug coverage at all, two out of five of these folks 

underinsured actually go without filling their prescriptions as well. 

So, a problem of the uninsured and the underinsured. 

Of course, some folks don’t have coverage through their employer. They are in the individual market. I would just point out 

that in the unregulated individual insurance market consumers are 

four times less likely to have prescription drug coverage at all. Certainly, for people with chronic conditions, that is where we see the 

most impact in terms of high prescription drug spending. A person 

with a single chronic condition can spend—about 36 percent of 

their out-of-pocket costs will be for prescription drugs. If it is a person with two or more chronic conditions, their out-of-pocket spending for drugs can be six times higher than their hospital costs. 

Now that is not necessarily a bad thing. I am just giving you a 

sense of the impact on consumers. It may be those prescription 

drugs are keeping them out of the hospital. Certainly, we know 

that there is a toll in terms of reduced quality of life, reduced productivity; and sometimes it means death not to have access to prescription drugs. It also means that our health care system has 

higher costs long term. 

I will tell you one more story. It is a story of a child with asthma. 

Both of this child’s parents work full time. They have pretty good 

insurance coverage for themselves. They have no dependent insurance coverage. So their kid is not covered. Their son has asthma. 

He needs a maintenance drug that costs a couple hundred dollars 


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a month. Because they don’t have dependent coverage for their 

son—and they don’t qualify for CHIP, by the way—their son 

doesn’t get the asthma medication on a regular basis. They can’t 

afford it. It is hundreds of bucks a month. These are low-wage 

working parents. 

They have tried things like making their fifth-grade son wear a 

mask when he goes to school to help with the maintenance and the 

management of the asthma. If you have ever tried to send a fifthgrade boy off to school with a mask, you know that is probably not 

going to work too well. 

So the end of the story is, obviously, the child without regular 

asthma medication to maintain and monitor his asthma to keep it 

under control, he ended up in the emergency room and he had a 

very high-cost hospitalization, and it had a very hard financial impact on the family. 

Mr. PALLONE. I appreciate it. I am going to ask you to stop now 

because you are almost 3 minutes, but thank you. 

[The prepared statement of Ms. Stoll follows:] 


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Mr. PALLONE. Professor Vernon. 

STATEMENT OF JOHN A. VERNON, Ph.D. 

Mr. VERNON. Mr. Chairman and members of the committee, 

thank you for the invitation to testify today. My name is John 

Vernon and I am a professor in the Department of Health Policy 

and Management at the University of North Carolina at Chapel 

Hill and a Faculty Research Fellow with the National Bureau of 

Economic Research. 

In addition to discussing the issue of rising drug prices, I will 

also discuss the role drug prices pay in firm- and industry-level 

R&D investment. The latter is of critical importance because considering drug prices in isolation is not useful. The tradeoff between 

drug prices, industry profits, and innovation is what is relevant. 

My research on this point is based on unfunded research published 

in the peer-reviewed economics literature. 

Regarding the issue of rising drug prices in the U.S., the conclusions drawn by the AARP report are based on flawed methods and, 

thus, are misleading. Some of the more serious flaws with the analysis are: 

The AARP report is based on wholesale prices, not retail prices 

or transaction prices, which are often substantially lower than 

wholesale prices. This is because PBMs and insurers negotiate discounts, often steep discounts, and rebates with manufacturers. 

Second, the AARP report is an analysis of branded products only. 

The burden to U.S. consumers of prescription medications associated with access to prescription drugs should also consider generic 

drugs, which in the U.S. have among the lowest prices in the world 

and the highest utilization rate. 

For example, approximately 70 percent of all prescription drugs 

dispensed are generic drugs. So we have both the highest utilization rate and the lowest prices. Much of this credit goes, of course, 

to the 1984 Waxman-Hatch Act, which did a nice job of balancing 

innovation with generic competition. 

Three, in the AARP report, 10 of the top 25 branded pharmaceuticals in their study actually have generic versions currently on 

the market. Mandatory generic substitution laws in most States 

implies that the lower-cost generic versions of these 10 brands 

drugs are dispensed to consumers, not the branded versions. 

In my opinion and based on my experience as both an academic 

journal editor and peer-reviewer for academic journals, this study, 

as it stands, does not meet the peer-review standard for economic 

publication—and that is the hallmark of academic research. A better measure, in my opinion, of drug price trends in the U.S., one 

that is based on retail prices, not wholesale prices, and which also 

captures the cost savings from generic competition and substitution, is the prescription drug Consumer Price Index reported by 

the U.S. Bureau of Labor Statistics. The BLS prescription drug inflation rate for 2009 is approximately 3 percent, or roughly onethird of the 9 percent inflation rate reported by the AARP. 

Moreover, the change in drug price inflation was approximately 

half that in the most recent year of the change in the inflation rate 

for nonprescription drugs and medical supplies. This suggests a 

small increase in prescription drug prices may reflect broader 


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health sector market dynamics and not an isolated increase in prescription drug prices. 

As previously mentioned, the consideration of prescription drug 

prices in isolation is an incomplete and misleading exercise. What 

must be considered are the costs and the benefits of higher or lower 

prescription drug prices and, specifically, the economic tradeoff between access to existing medicines and access to future, yet-to-bediscovered medicines. 

The expected returns on individual R&D projects are directly related to expected pharmaceutical prices and profitability; price controls or indirect price controls via such mechanisms as reimportation or technology assessment rationing lower expected net returns 

for firm shareholders. The result will be a decline in the rate of 

pharmaceutical innovation, fewer drugs developed, and it will take 

a longer time to find cures for many diseases. 

Unlike the benefits of the price control policy, which clearly 

would be to improve access for today’s consumers and seniors—implicit price controls, which will produce immediate and observable 

cost savings through lower drug prices—the costs of a price control 

policy in terms of forgone innovation is much more difficult to appreciate and quantify. 

What might we have discovered? How much more quickly would 

we have found a cure for Alzheimer’s disease? These are very nebulous and difficult to appreciate and certainly to quantify, but that 

does not justify not considering these very important costs. A full 

economic analysis considers both the costs and benefits of any policy or health care reform. 

The sensitivity of R&D spending to pharmaceutical prices and 

profits has been studied with a variety of different research methods, including standard retrospective statistical analyses of 

industry- and firm-level data, protective simulation analyses, and 

financial event studies. The research findings have been strikingly 

consistent and robust. I will summarize the results from two recent 

studies published in the economics literature that I authored by 

myself and with coauthors. 

The first study utilized publicly available firm-level financial 

data and exploited observable differences in the U.S. and non-U.S. 

pharmaceutical profit margins. Outside the U.S., most countries 

have some form of price regulation, explicit or implicit. Using established economic models and statistical techniques, we estimated 

that a new policy that reduces pharmaceutical profit margins in 

the U.S. to non-U.S. levels will cause firm R&D spending to decline 

by between 25 and 35 percent, all things considered. 

A policy that regulates prices in the U.S.—for example, reimportation from foreign markets with forced sale clauses, those 

foreign markets, of course, having price regulation—will theoretically have this effect on U.S. profit margins. 

The second study adopted a slightly different approach and utilized publicly available industry-level data to study the direct link 

between U.S. drug prices and industry-level R&D spending. In this 

study, we estimated that for every 10 percent reduction in U.S. 

prices, industry R&D spending will decline by approximately 6 percent. We call that an elasticity estimate of R&D with respect to 


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real drug prices in the U.S. This finding is also consistent with an 

earlier study by Harvard economist, F.M. Scherer. 

In sum, the empirical evidence suggests that firm R&D spending 

is very sensitive to pharmaceutical prices and profits and to prices, 

as the economic theory would predict and the empirical literature 

supports. The key point is that the benefits associated with lower 

drug prices—and it cannot be argued that there would be benefits 

and improved access to medicines that are currently on the market 

and available—would unequivocally come at a cost: lower levels of 

R&D investment and a reduced rate of pharmaceutical innovation. 

It is critical that these costs be balanced carefully against the benefits of associated regulation, explicitly or implicitly, that regulates 

drug prices. This is particularly true in light of the recent evidence 

on the significant contributions of pharmaceutical and medical 

R&D to human health and life expectancies in the U.S., research 

that suggests the U.S. is currently underinvesting in medical and 

pharmaceutical research based upon the benefits that we enjoy in 

America as a result of improved quality of life and extended life 

expectancies. Thank you very much. 

Mr. PALLONE. Thank you, Professor. 

[The prepared statement of Mr. Vernon follows:] 


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Mr. PALLONE. Ms. Cramer. 

STATEMENT OF BONNIE CRAMER 

Ms. CRAMER. Thank you, Mr. Chairman and members of the 

Health Subcommittee. I am Bonnie Cramer. I am chairman of 

AARP’s all-volunteer board of directors, and on behalf of our 40 

million members, thank you for including AARP in this discussion 

of brand-name prescription drug prices. 

As you know, AARP is deeply committed to making prescription 

drugs affordable for our members and for all Americans; and 

whether we are ready to admit it or not, the United States is aging 

at an unprecedented rate. Starting on January 1, 2011, 10,000 people will turn age 65 every day, and this will continue for the next 

20 years. When combined with the rapidly escalating brand-name 

prescription drug prices and the fact that older Americans use prescription drugs more than any other segment of the population, it 

seems evident that many Americans will soon find themselves unable to access the drugs they need at a price they can afford. And 

that, we believe, is not acceptable. 

As part of these efforts, AARP’s Public Policy Institute, working 

with Dr. Schondelmeyer, has been reporting on manufacturer price 

changes for prescription drugs. Since 2004 we have done our prescription drugwatchdog report. Our latest report found, as you have 

heard, that average manufacturer prices for widely used brandname and specialty prescription drugs continued to increase substantially between October of 2008 and September of 2009, rising 

by 9.3 percent and 10.3 percent respectively. 

Now it has been twice said that 70 percent of all prescription 

drugs are generic, but you need to know that 76 percent of all 

spending is for brand drugs. 

Rising prescription drug prices are a source of concern for many 

of our members and it can impact their health. The inability to afford needed prescription drugs has been shown to negatively impact patient adherence to drug regimens. Many consumers report 

that they have not filled prescriptions, they skip doses, and they 

cut pills in half as a result of high prescription prices. These are 

stories that we hear from our members every day. This type of behavior in turn can lead to more expensive health care needs in the 

future. 

Problems paying for prescription drugs are more common among 

those taking a larger number of medications, such as older adults. 

Approximately 20 million AARP members are over the age of 65 

and eligible for Medicare. The Part D benefit, which AARP fought 

very hard to enact, provides much-needed prescription drug coverage for Medicare beneficiaries, but unfortunately, the Part D benefit currently contains a doughnut hole, where the beneficiary must 

shoulder the entire cost of the drug as well as continuing to pay 

their premiums. More than 3 million Americans are at risk of falling into the doughnut hole each year and feeling, firsthand, the impact of rising prescription drug prices. 

Unfortunately, because the doughnut hole is indexed to prescription drug spending, the doughnut hole is growing larger each year; 

as a result, more people will fall into the doughnut hole in the fuVerDate Mar 15 2010 23:58 Oct 19, 2012 Jkt 074858 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 E:\HR\OC\A858.XXX A858

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ture. And that is why we at AARP have made closing the doughnut 

hole one of our top priorities as part of health care reform. 

But price increases also impact Medicare Part D enrollees. It impacts their cost sharing for their brand-name prescription drugs. 

A recent AARP Public Policy Institute analysis of most national 

Part D plans shows that in 2010, more plans will require copayments of close to $100 per drug for certain brand-name drugs. 

Other plans will use coinsurance or a percentage of the drug’s cost 

for brand-name medicines as high as 65 percent of the drugs cost. 

We are greatly concerned about the future of Medicare’s Parts D 

and B, which are financed through premiums and general revenues. As prescription drug prices continue to increase, spending 

will grow correspondingly, which means that all Medicare beneficiaries as well as all taxpayers will be required to pay more in 

order to keep the program solvent. 

Now, AARP was pleased to endorse the Affordable Health Care 

for Americans Act, H.R. 3962, that recently passed the House of 

Representatives. For years, AARP has been fighting to make sure 

that our members and all Americans have access to affordable 

health care coverage. Key to our endorsement was provisions that 

would close the doughnut hole, which the House would begin to do 

next year, and fully close the doughnut hole by 2019. 

We also support the House health bill’s provisions that would 

grant the Secretary of Health and Human Services the authority 

to negotiate on behalf of Medicare beneficiaries. We have also supported provisions that would promote medication therapy management services. 

So, Mr. Chairman, thank you for your continuing efforts to improve the Nation’s health care system. At AARP we look forward 

to continuing to work with you to ensure that prescription drugs 

remain affordable for our members and all health care payers. 

I appreciate the opportunity to be with you today, and I look forward to your questions. 

Mr. PALLONE. Thank you, Ms. Cramer. 

[The prepared statement of Ms. Cramer follows:] 


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Mr. PALLONE. We are going to have questions now from the 

members, and I am going to start with myself. I am going to try 

to get in two topics here with you, Mr. Schondelmeyer. 

When we passed or when we finalized the health care reform legislation, it will mark the second time in 6 years Congress has 

passed important legislation affecting the prescription drug market. In 2003, we passed the legislation creating Part D; and you 

have analyzed drug prices before and after Part D went into effect. 

So what happened in the months before Part D went into effect, 

and are we seeing the same thing happening now with this health 

care reform legislation? 

Mr. SCHONDELMEYER. Well, I would respond by providing observation and pointing you to figure 5 in the testimony that I prepared. Basically, it shows in the time period prior to Medicare Part 

D being first passed and then later enacted—remember, there was 

a delay time between when it was passed and when Part D actually got implemented, 2003 to 2006—prescription drug prices did 

increase during that time period substantially. They leveled out, if 

6-plus percent is leveling out, in terms of price increases for a brief 

period, and then after last fall’s elections in November when it appeared that health care reform might be a topic that comes into 

play again, we saw an increase. 

Now, this is not a cause-and-effect relationship, but if one looks 

at the graphs, it is pretty apparent there is an increase. 

Mr. PALLONE. So you don’t think it is a coincidence, obviously. 

Mr. SCHONDELMEYER. I don’t think it is. There are multiple factors that affect the drug companies’ choice to raise their prices, but 

I think this is certainly one that weighs in. 

The mentality that may be going into effect is, if R&D is as important to them as they say it is—and I believe it is; and I want, 

we as a society want, the innovation and R&D and other factors. 

So if they rationalize, if they are going to start controlling or affecting my prices by having a more effective market in some way, and 

I have a less controlled market right now, I am going to push the 

price as much as I can so when they start squeezing, I am at a 

higher point on the mountain when they are trying to bump me 

down a little bit. So it makes sense to do that. 

Mr. PALLONE. Mr. Smith, I will let you have an opportunity to 

respond, but I have to go back to him. So if you could just spend 

about a minute or so. 

Mr. SMITH. Mr. Chairman, thank for the opportunity to respond. 

Unlike Dr. Schondelmeyer, I am not going to speculate about motives. As I made clear in my statement, I can’t discuss pricing decisions and so forth. But what I can say is that, number one, the 

Consumer Price Index, as has already been discussed, has, for the 

year ended with the period that AARP looked at, was up about 2.7 

percent. 

I can also tell you that the prices are negotiated with purchasers 

who are large, sophisticated and powerful and have many tools. My 

guess would be, and I have to underline guess, my guess would be 

if a company went to one of these purchasers and said, We need 

you to pay us more because health reform is coming, they would 

be laughed out of the room. 


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Mr. PALLONE. OK. Now I am going back to you, Dr. 

Schondelmeyer. 

At some point—I don’t know if it was in your testimony or in 

your written statement—you mentioned that the wholesale acquisition cost does not include discounts or rebates that are provided by 

the manufacturers to wholesalers. When these discounts were 

factored in, it has the effect of lowering the price paid. 

You stated in your footnotes that there are no consistent comprehensive and publicly reported data sources for this discount and 

rebate information. That gets to the issue of transparency. That is 

my question. 

How would better drug pricing transparency help patients? I 

mean, what would you suggest in terms of trying to create more 

transparency? 

Mr. SCHONDELMEYER. First, if we are really talking about an economic market and making wise decisions, we need to avoid asymmetric markets, where the seller knows a whole lot more about 

their product than the buyer. Asymmetric markets were defined by 

Nobel economists who described the market for lemons, or used 

cars. 

In a sense, drug companies, thankfully, know a lot more about 

our drug product than we do, but that gives them extreme economic power in the marketplace. Rebates and discounts are out 

there, and they may lower the actual price, but they don’t lower 

the rate of increase unless the rebates and discounts are increasing 

as a proportion. 

Mr. PALLONE. What do you suggest in terms of what we could do 

on transparency? 

Mr. SCHONDELMEYER. Well, one, for example in Medicare Part D, 

you could require that Part D plans disclose the amount of rebates 

that they get. Apparently, the committee in the past couple of 

years has done studies of the Part D plans. The Part D plans have 

reported that they get rebates on about 10 to 14 percent of the 

drugs; and they may get some rebates, but they have admitted they 

don’t pass them on to the consumer. And, apparently, it doesn’t 

lower the premiums, because this last year Part D premiums went 

up 11 percent, and last year they went up 17 percent. 

So the only two places I can see that rebates can benefit either 

the Medicare beneficiary or the taxpayer would be in lower premiums or lower prescription prices. And they don’t appear to show 

up in either of those. 

I don’t know where they went. 

Mr. PALLONE. Thank you. 

Mr. Deal. 

Mr. DEAL. Ms. Cramer, I am told that 52 percent of AARP’s annual revenues come from royalty fees from insurance company 

profits, and less than 20 percent of it comes from your membership 

dues. In 2008, I am told that AARP generated $414 million in royalty fees from United Health Care Corporation. 

Could you tell me what percentage of those revenues came from 

the sale of AARP Medicare supplemental insurance plans that were 

offered by United Health Care Corporation? 

Ms. CRAMER. I don’t have that figure with me. I will be glad to 

get it for you. Those numbers you cited are approximately correct. 


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But let me just say that AARP is not an insurance company; we 

contract with United Health Care to provide insurance to our members, and we provide market-changing policies. We make sure that 

our members have the best policies that we can have under State 

and Federal law. 

Providing insurance to AARP members is the reason AARP was 

formed over 50 years ago, when our founder—the private market 

was not serving older people, and it was not serving retired teachers. Our founder was a retired teacher. It is the beginning of our 

organization. 

But I do want to say one other thing, which I have heard said 

in Congress numerous times, especially over the weekend. I am the 

chairman of the all-volunteer board. We had over 15 to 20 meetings 

on health care reform—detailed meetings. Not once, not once, did 

the AARP board talk about the money we might make on our insurance products or the money we would lose. We would gladly 

forgo—— 

Mr. DEAL. You will get us information to the question that I have 

asked. 

Ms. CRAMER. I will get the information on what portion is related 

to Medicare supplement. 

Mr. DEAL. When you announced your endorsement of the immediate health care reform plan, you cited the fact that preexisting 

conditions would be excluded under that legislation, yet the supplemental plan that you sell has a 6-month waiting period. And the 

way the legislation has been crafted is that your supplemental insurance plan will still continue to have the opportunity for a 6- 

month waiting period as an exclusionary period. 

Was that a condition that was negotiated with the White House 

as a condition of endorsement? 

Ms. CRAMER. It was not a condition that was negotiated with the 

White House. And AARP has been on record for a long time of supporting guaranteed issue for Medicare beneficiaries. 

Mr. DEAL. But do you think it is fair for your supplemental plan 

to have a preexisting condition exclusion, whereas other plans in 

the basic coverage would not? 

Ms. CRAMER. That is something that we can look at. It was not 

a deal with anyone. And certainly we do support guaranteed issue. 

Mr. DEAL. All right. Let me ask the panel, and this would be 

something that any of you could address. 

We are concerned here about trying to figure out how to get consumers in the United States the best value for the dollar they are 

paying for prescription drugs. Do you believe that U.S. consumers 

are paying a disproportionate share of R&D costs compared with 

the rest of the consumers in the world? 

Does anyone want to take a shot? 

Mr. SMITH. Mr. Deal, I will note that other countries clearly 

underfund their R&D. They are not paying their share of R&D, 

particularly other developed countries, and I believe the result is, 

less R&D occurs and fewer new drugs are discovered, and that is 

a loss to Americans as well as people in their own country. 

Mr. DEAL. Aren’t you shifting those costs to American consumers? 


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Mr. SMITH. Mr. Deal, I can’t speculate about how pricing might 

occur cross-nationally. 

Mr. DEAL. Dr. Schondelmeyer, do you have an observation? 

Mr. SCHONDELMEYER. Well, again, in terms of the individual decisions of companies and specific decisions, it is hard to say. But 

if you look at the market, and as described by Mr. Smith, if other 

countries are underfunding and we are paying a substantially higher price and we are getting R&D, which we value, we are overpaying; we are essentially letting other countries be free riders on 

the R&D that we are paying. 

What we do with that is a different issue. I think we probably 

need to look for a new model of funding R&D. Rather than funding 

10 years from now the new drugs based on the high price of drugs 

today to the degree that some people can’t afford them, I am not 

sure that model is working today. 

Mr. DEAL. I want to go to your analysis that brand-name drugs 

increased 9.3 percent in your study. Specialties, which you say 

were primarily biologics, increased by 10.3 percent. 

Isn’t it logical that in the brand names, where their patents will 

expire, that those prices will drop in the future; whereas if we 

grant, in addition to patent protection, some 12 or more years of 

market exclusivity on biologics, that you are going to see that increase in the biologic arena continue to be an escalation? 

Mr. SCHONDELMEYER. I don’t recall more than two or three 

brand-name drugs that I have ever seen drop their price, and those 

were under political pressure. It was pointed out that some of the 

drugs in our index have generic competitors in the market, and yet 

those brand-name drugs continue going up in price, sir. 

Mr. DEAL. Yes. But if you build in a 12-year exclusivity period 

that prolongs any ability for follow-on biologic, don’t we compound 

that problem? 

Mr. SCHONDELMEYER. Not necessarily. I think one has to do an 

assessment of what is an appropriate time for recovering that innovation cost and R&D cost. I think if you make it too short, you can 

stifle innovation. I think if you make it too long, you can stifle innovation. If you make it too long, you allow companies to rely on 

cash cows, which is much of what we see now, products they just 

keep hanging on to and riding, rather than—what they find is 

Nexium instead of Prilosec, which isn’t a new drug, it’s just a righthanded version; or Ambien CR instead of Ambien, which isn’t a 

new drug, it is just a manipulation. 

So if we let the period be too long, it can be just as damaging 

as too short. I think the period that is currently in the bill at 12 

years is on the long side. 

Mr. PALLONE. Chairman Waxman. 

Mr. WAXMAN. We have heard the estimate that the amount of 

prescription drugs over a 10-year period has increased 72 percent. 

That is a big increase in people using drugs, or at least a number 

of prescriptions. So the market for drugs has increased over the 

last 10 years. 

Dr. Schondelmeyer, you say that the drugs in the past year have 

increased, on an average, 9 percent; is that a correct statement? 

Mr. SCHONDELMEYER. It is, but we need to parse out increased 

expenditures from increased prices. Expenditures go up because of 


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increased utilization and increased price and increased changes in 

the mix. 

The price index I report with AARP is a pure price index. Price 

only. The actual utilization of prescription drugs in the last year 

to 2 years has flattened out or even decreased slightly in some 

therapeutic markets, yet the prices keep going up. And the private 

payers, the large PBMs, report price increases similar to the 5.4 

percent that we show for our aggregate composite index, rather 

than the 2.7 percent that CPI has. 

Dr. Vernon commented that my study only looked at brand-name 

drugs. Apparently, he has only read the New York Times version 

of my study, because if you read the full study, you will see that 

we look at brand names and specialties and generics, and we calculate a composite index. 

Mr. WAXMAN. So you have a composite index of all those drugs. 

Let’s parse them out. 

Are brand-name drugs where the drug manufacturer still holds 

a patent, which means it has a monopoly, going up faster than the 

increase for the prices for those drugs than generic drugs competing with a brand-name drug? 

Mr. SCHONDELMEYER. In our index, brand-name drugs can be either patented, single-source products or it can be brand-name 

drugs. The originator, the original NDA holder, they may not have 

discovered the drug at all; they may have licensed it in. But the 

original NDA holder, even after the drug is off patent, may still be 

in our index, in some cases, because those products are still on the 

market and the prices are going up. 

So we track those prices and then we track generics, and they 

are going in opposite directions—9.3 percent up and 8.7 down for 

generics. 

Mr. WAXMAN. So where there is competition from generics, the 

generics are going down in price? And where there is no competition, the price of drugs is increasing? 

Mr. SCHONDELMEYER. It is increasing. And even the brand name, 

when it has generic competition, doesn’t enter into the economic 

competition by lowering its price. It may lose volume, but it doesn’t 

lower its price. 

Mr. WAXMAN. This seems to be happening whether the economy 

is booming or in a recession, whether the number of uninsured is 

going up or down; it doesn’t make any difference. 

Mr. SCHONDELMEYER. It doesn’t appear to have done so over the 

last decade, and we have had both of those periods, some booms 

and some busts. 

Mr. WAXMAN. Over the last decade, I assume that the increases 

are every year. Are they pretty level or is this 9 percent higher 

than the general increase over the last 10 years, let’s say? 

Mr. SCHONDELMEYER. The rate of increase is the highest, at least 

from the data I have done with AARP I have seen in the last 7 

years. When I look at other similar data going back even 15 years 

or more, this is the highest level we have been at for quite some 

time. 

Mr. WAXMAN. Now let me go back to the question Mr. Deal asked 

you. The specialty drugs, which really biologic, these are the new 


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breakthrough drugs, but they are very expensive drugs, aren’t 

they? 

Mr. SCHONDELMEYER. Yes. These, on average, cost thousands to 

tens of thousands of dollars, if not in some cases, hundreds of thousands of dollars per year. 

Mr. WAXMAN. For the most part, these drugs have no competition? 

Mr. SCHONDELMEYER. They do not have competition directly and 

in an economic sense. 

Mr. WAXMAN. In an economic sense? What does that mean? 

Mr. SCHONDELMEYER. In a sense it would lower their price. 

There may be two drugs for multiple sclerosis, and the drug companies may very vehemently compete through advertising and 

through calls on the doctors that treat those patients, but it hasn’t 

had an effect on the price, an appreciable effect on the price. 

Mr. WAXMAN. Is that because one is not substitutable for the 

other? 

Mr. SCHONDELMEYER. Substitution has been a major mechanism 

to bring about economic decline of generic prices in the regular 

drug market, and that is not available for the biological products. 

There is no equivalent of an ANDA for a biological license applicant. 

Mr. WAXMAN. Now there is a bill that promises the developer of 

a generic drug 12 years of exclusivity and then there can be competition. But that competition may not be a substitutable competitor. So we are not guaranteed a reduction in prices even after 12 

years; isn’t that right? 

Mr. SCHONDELMEYER. That is probably correct. It depends on the 

terms of how that bill would bring about or allow other products 

in the marketplace. 

What you need is an equivalent of the FDA therapeutic equivalence evaluation for normal pharmaceuticals to be developed for the 

biological markets. 

Mr. WAXMAN. They claim they have to have a 12-year exclusivity 

because competition is going to drive down the price of that drug 

so dramatically. But, in effect, they are going to have much longer 

than 12 years to be recouping a huge amount for their drug. 

So what we are really talking about is not just a 12-year period, 

but a much longer period of time in which this drug will have market dominance; isn’t that correct? 

Mr. SCHONDELMEYER. That is quite likely. In addition, they are 

likely to come out with alternate dosage forms and remarket the 

drug in a different dosage form that has a new patent, has a new 

exclusivity. 

Mr. WAXMAN. We have ‘‘evergreening’’ in the bill that passed the 

House and the Senate, which means there is no end to the monopoly control they are going to have over these biologic drugs. 

Monopoly control, is it fair to say, in your experience, means 

higher prices? 

Mr. SCHONDELMEYER. Yes. 

Mr. WAXMAN. Thank you, Mr. Chairman. 

Mr. PALLONE. Thank you, Chairman Waxman. 

The gentleman from Illinois, Mr. Shimkus. 


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Mr. SHIMKUS. Thank you, Mr. Chairman. I think we are developing more questions through this hearing, but that is a positive 

thing. 

Ms. Stoll, I would just request that if you have these constituents’ stories, one, I would ask if they have gone to their Member 

of Congress to ask for assistance. We deal with folks in many of 

these similar situations. 

I would also highlight the fact that if that Member is not willing, 

if you provide those names to my office, we will try to intervene. 

Because I know the pharmaceutical companies have options in 

which they can provide discounted or low-cost or drugs for free; and 

we use those operations frequently in my congressional service. 

I have limited time, but I want to throw that out as on option 

for these stories that you have given us today. 

To Mr. Smith, we have heard a lot about the ‘‘deal’’ between 

PhRMA and the White House. Can you explain what that deal is? 

Mr. SMITH. Congressman, what I can do is—I wasn’t asked to 

come and explain the deal today. I can try to give you sort of—— 

Mr. SHIMKUS. I have been told it is pretty well public knowledge. 

Mr. SMITH. There have been public announcements by the White 

House. I believe AARP attended a public announcement of the initiative at the White House. There are public announcements from 

the Finance Committee. 

Our board concluded that in line with its longstanding support 

for moving forward health reform, that was mentioned by the 

chairman in his opening comments, that we wanted to support 

moving forward—— 

Mr. SHIMKUS. I am actually looking for more of the specifics. 

Do you know if the Senate health bill reform reflects the negotiations? 

Mr. SMITH. The Senate bill is so much in flux, it would be hard 

for me to make an assessment. 

Mr. SHIMKUS. I would like for you all—these are questions that 

I would like to get answered. I would hope that you would. My concern is H.R. 3962, there are negotiations behind closed doors, and 

I want to know if those have negotiated, which then turns me to 

AARP. 

Ms. Cramer, you said that—Mr. Chairman, I would like the consolidated financial statements from December 31, 2008, and 2007, 

and the IRS form 990 for 2008 submitted for the record, with your 

approval. 

Mr. PALLONE. Can I just take a look at it, because I am not sure 

I know what you are talking about. 

Mr. SHIMKUS. It will be followed up with these questions. 

Ms. Cramer, you stated that you all don’t have an insurance 

plan, but on the 990 you list one. On the IRS Form 990, it says 

‘‘the AARP insurance plan.’’ So my question is, do you have an insurance plan or do you not? 

Ms. CRAMER. What I said is that we contract with United and 

other health insurers to provide insurance to our members. We also 

contract with Aetna for the 50- to 64-year-old product. 

We contract with Genworth to provide long-term care insurance 

to our members. We even provide homeowners insurance and car 

insurance to our members. 


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Mr. SHIMKUS. Reclaiming my time, what it says on the IRS Form 

990, At the direction of third-party insurance carriers, the plan 

pays AARP, Inc., a portion of the total premiums collected for the 

use of its intellectual property, which is reported as royalties in the 

consolidated statements of activities. Is that correct? 

Ms. CRAMER. It is correct that we make royalties off the sale of 

insurance plans. 

Mr. SHIMKUS. So you are acting as a grant or trust. And, in essence, when these profits are made through the selling of this insurance, the net then goes back to you all. In fact, AARP benefits 

from selling the most costly insurance because that portion then 

goes to operate AARP at a major profit; is that correct? 

Ms. CRAMER. It goes back to support the advocacy and education 

efforts of AARP, yes. 

Mr. SHIMKUS. And I would say in about current operations that 

is about $653 million in annual revenue, based upon this portion, 

which was stated by Mr. Deal as. What, three-fourths of the operating budget? 

Ms. CRAMER. The budget is about $1.3 billion, but that amount 

is approximately correct, yes. 

Mr. SHIMKUS. Fifty-two percent of your fees or annual revenues 

come from these insurance fees, and 20 percent of AARP’s annual 

revenues come from membership dues, correct? 

Ms. CRAMER. About 24 percent. 

Mr. SHIMKUS. Could you operate without this $653 in annual 

revenue? 

Ms. CRAMER. I have already answered that question. We were 

founded on providing—— 

Mr. SHIMKUS. Can you operate currently without this revenue 

that you all receive based upon selling insurance, yes or no? 

Ms. CRAMER. We have never looked at that. I don’t know how to 

answer that. 

Mr. SHIMKUS. So if you are without $653 million, you don’t know 

if your operations will change? 

Ms. CRAMER. Well, obviously, it would change if it is 52 percent 

of the revenues. 

Mr. SHIMKUS. Thank you. I yield back. 

Mr. PALLONE. The gentleman from Illinois has asked for unanimous consent to enter into the record AARP’s consolidated financial 

statements from December 31, 2008 and 2007. Without objection, 

so ordered. 

[The information appears at the conclusion of the hearing.] 

Mr. PALLONE. Next is the gentlewoman from California, Ms. 

Eshoo. 

Ms. ESHOO. Thank you, Mr. Chairman. I can’t help but observe 

the following. It is always interesting around here when advocacy 

organizations endorse legislation. I remember not that many years 

ago when my friends on the other side of the aisle had their arms 

wrapped around AARP, hugging them so tight, because they were 

supporting Medicare Part D and all that came with it. 

Today, they are attacking the hell out of AARP because they 

have endorsed this side of the aisle’s health care—universal health 

plan for the American people. So I guess, as Kurt Vonnegut said, 

‘‘And so it goes.’’ 


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But I can’t help but make the observation; I guess that is the 

way it goes around here. 

Thank you, each one of you, for coming to testify. I think if we 

could stay away from good guys and bad guys, we would just be 

much better off. What we need to do is to scratch below the surface 

and see what it is that is causing the prices to be what they are, 

which we all know is a burden to the American people and especially older citizens in our country. 

I believe in research and development. I believe in science. It is 

at the heart of all of the work that I have done here in Congress. 

Some say that favors some and doesn’t help others. I think that 

that is a source of pride to our country, and I want to keep that 

and innovation alive. But I also think we can do a much better job 

with what the costs are. 

Now, the House has already passed the health care reform legislation, and hopefully the Senate is going to do the same. As we go 

to conference, I think it is important we get some perspective in 

how provisions in these bills will help to reduce drug costs. The 

House bill has numerous provisions to protect taxpayers and all 

citizens from increasing drug prices. It increases Medicaid rebates; 

it provides drug coverage with 36 million citizens; it requires pharmaceutical manufacturers to give a 50 percent rebate for drugs in 

the doughnut hole; it closes the Part D doughnut hole, which the 

other side all created, together with AARP, and thought it was terrific then. Now it is costly and we are being attacked for what it 

costs to plough back and fill this hole, but fill this hole we must 

do because of what it is doing to senior citizens. It allows the Secretary to negotiate for lower Part D drug costs. 

Now the Senate bill contains some of these provisions, but not 

all. It doesn’t close the Part D doughnut hole, doesn’t allow the Secretary to negotiate, and it doesn’t create new Part D rebates. 

So, to Dr. Schondelmeyer, let me ask you generally, do you believe the provisions in the House bill or the Senate bill will do a 

better job of protecting seniors and taxpayers from rising drug 

prices? I mean, it is a softball question, but I think we need to get 

the answer on the record. 

Mr. SCHONDELMEYER. I believe there are many useful provisions 

in the House bill that would assist in that goal. As with many tools 

that we have in society, it all depends on how they are implemented. 

Ms. ESHOO. Ms. Cramer, do you agree? 

Ms. CRAMER. We have strongly supported the House bill. We are 

working every day in the Senate to try to get the doughnut hole 

closed completely. 

Ms. ESHOO. Let me ask about a specific provision in both bills. 

It is a provision that requires manufacturers to provide a 50 percent discount on brand-name drugs in the doughnut hole. My understanding is that this offer was made by the drug manufacturers 

as part of their negotiations with the Senate and the White House. 

Now this is not a bad provision. We have it in the House bill as 

well. But it seems to me that it has some problems. What manufacturers give, which in this case is a 50 percent discount, manufacturers can take away by increasing the base price of their drugs. 


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So, to Dr. Schondelmeyer, am I understanding this correctly? As 

manufacturers increase prices, can they also wipe out many of the 

benefits of this 50 percent discount? 

Mr. SCHONDELMEYER. I believe they can, and they have the market power to do so. Their current price increases for this year may 

have come close to wiping out the whole $80 billion over the next 

10 years. 

Ms. ESHOO. Let me ask the panel, whoever would like to step up 

and answer this, what do you think is the best way to protect us 

from what I just described? 

Mr. SMITH. Congresswoman, thank you for the opportunity to answer. 

Ms. ESHOO. Keep it short. 

Mr. SMITH. I will, absolutely. 

Part D, as you know, has come in at much lower cost than expected. That is because of the competition and the negotiation that 

goes on. Contrary to Dr. Schondelmeyer’s point, of course, the 50 

percent discount that will be provided in the coverage gap is a 50 

percent discount off of the negotiated price. So I think that there 

is a real benefit to seniors there. 

Ms. ESHOO. Dr. Schondelmeyer, do you want to respond? 

Mr. SCHONDELMEYER. You tell me how much discount you want, 

and I will tell you what the price is. That is kind of the way the 

market works today. Yes, there is some negotiation, but it is at the 

margins. It is mostly about retail prices, not about meeting the retail margin and the retail dispensing fees. It is not much about 

brand-name, single-source drug product negotiations. 

I work with major buyers in the marketplace with my own university, and we don’t get discounts on those brand-name prices. 

Mr. SMITH. Congresswoman, can I get 5 seconds of your time, 

please? 

Ms. ESHOO. You have to ask the chairman, not me. 

Mr. PALLONE. Yes, and then we are going to finish. 

Mr. SMITH. I will simply note, contrary to Dr. Schondelmeyer’s 

assertions, if you look in the Medicare trustees’ report, they will 

note that while generics don’t carry rebates, I believe their phrasing is many brand-name drugs carry rebates, often 20 to 30 percent. 

Mr. SCHONDELMEYER. Generics are priced so low, a rebate still 

doesn’t get the brand name close to the generic price. 

Ms. ESHOO. Mr. Chairman, I think this whole issue of the increase of the prices says to us that we need to get socks on this 

octopus. Because if the rate continues to rise as much as it already 

has, and the predictions of the industry itself underscoring that, 

then by the time the entire national plan for universal health care 

takes place, then that whole new floor—a whole new floor is established. 

This is about bringing prices down across the board so we have 

affordability for people. I think that we have got to press hard, look 

hard on a provision that will be placed in the bill. 

You know what I would be willing to do is to say that by such 

and such a date this is what you have to do, and a hammer comes 

down by that year. If you haven’t, then the prices are just going 

to drop. 


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Thank you. 

Mr. PALLONE. Thank you. And I apologize for turning the clock 

off. I wanted to make sure Mr. Gingrey got his 8 minutes, since he 

didn’t have an opening. 

I recognize the gentleman from Georgia. 

Dr. GINGREY. Mr. Chairman, thank you very much, and thank 

you for allowing me the extra time for questions. 

I am going to direct all my questions to AARP and to Mrs. 

Cramer. 

Ms. Cramer, my first question, to your knowledge, has AARP 

been contacted by the Justice Department concerning alleged large 

kickbacks—well, actually, you call them ‘‘royalties’’—that you receive from insurance companies for your Medigap plans, a matter 

that, as you know, Chairman Rangel suggested he would be referring to the Justice Department during the Rules Committee hearing on H.R. 3962 last month? 

Ms. CRAMER. To my knowledge, today, no. 

Dr. GINGREY. Well, if you do hear of that and have that information, that the Justice Department is looking into that, would you 

be willing to let the committee know that you have been informed 

by the Justice Department? 

Ms. CRAMER. Surely. 

Dr. GINGREY. Good. Thank you. 

The second question: Today, roughly a million customers purchase Medicare Advantage plans, roughly 8 percent of the market, 

and 2.8 million Medigap plans, representing roughly 30 percent of 

the Medigap market, bearing the AARP logo. Under the House and 

Senate health reform bills, Medicare Advantage plans would be 

cut—again, I am sure you know this—by as much as $160 billion, 

yet Medigap plans do not endure these same cuts. Under the House 

and Senate bills, Medicare Advantage plans would be forced to pay 

85 percent of revenues received for medical claims, yet Medigap 

would only be subject to pay 65 percent of its revenues on claims. 

Are you aware that Medigap plans are not held to the same 85 

percent standard as all other insurance products but Medicare and 

non-Medicare policies under the House or the Senate health reform 

bills, yes or no? 

Ms. CRAMER. No, I was not aware of that. 

Dr. GINGREY. Would AARP be willing to forego this sweetheart 

exemption that clearly favors AARP and their Medigap plans in 

order to help reduce the cost of health care for its members who 

receive their insurance from the Medicare program? 

Ms. CRAMER. I can’t answer that on Medigap. I can say that on 

Medicare Advantage we have supported the reduction. We also contract for Medicare Advantage plans and—— 

Dr. GINGREY. Well, reclaiming my time, I don’t understand how 

you could say that you are not sure or that you wouldn’t support 

that. 

Ms. CRAMER. I am just telling you, we have not discussed that 

and so I just can’t answer that today. I don’t have that information. 

We haven’t even discussed that among the board. 

Dr. GINGREY. Well, Ms. Cramer, in the interest of your 40 million 

AARP beneficiaries, including myself, don’t you think it would be 


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your responsibility as a board, all-volunteer board, to discuss 

things like that? 

Ms. CRAMER. As I indicated, I would be glad to get back with you 

on that. 

Dr. GINGREY. Well, I am glad to hear that. 

My third question: Representative Deal mentioned Medigap 

plans would not be subject to preexisting-condition coverage like 

every other insurance product sold in this country if H.R. 3962 

were to become law. 

Considering that an AARP member in New York has actually 

brought suit against you in January on this very issue, would you 

be willing to tell this committee today that AARP would like that 

provision changed in order to ensure that your members who currently receive their health care from the Medicare program would 

not be forced to purchase a Medigap plan with a preexisting condition? 

Ms. CRAMER. As I indicated previously, we have for years supported guaranteed issue of Medicare policies. 

Dr. GINGREY. Well, then your answer is, yes, you would be—— 

Ms. CRAMER. I believe I answered that we would discuss that 

within our board. I can’t answer that today, but we do support 

guaranteed issue. 

Dr. GINGREY. Well, I certainly would hope so, and I thank you 

for that response. 

Next question: The House and the Senate health reform bills would cut Medicare Advantage plans by as much as $160 billion, 

cuts that CBO figures will force 3 million seniors to lose that coverage and then revert to the traditional Medicare, and 8 million 

more if insurance companies are forced to stop selling altogether by 

the health choices czar, if he or she chooses. 

As we all know, Medicare Advantage plans offer seniors benefits 

that traditional Medicare doesn’t, services like dental, hearing, and 

vision, just to name a few. Therefore, seniors will be forced to purchase a Medigap policy to make up for those lost services, policies 

for which AARP has a significant market share and would stand 

to gain substantially. 

I see a significant conflict of interest in your support of legislation that would allow you, AARP, to gain customers, and therefore 

further royalties, from a product in which you have a significant 

market share, namely Medigap plans, because seniors are being 

forced off of Medicare Advantage plans, plans for which AARP 

products do not have a particular market advantage, as I think you 

said in your testimony. 

In light of these concerns, would AARP be willing today to rescind its support of H.R. 3962, of the Pelosi health reform act, if 

changes to bring Medigap policies in line with all other insurance 

products are not made, yes or no? 

Ms. CRAMER. We have supported the House bill. We have also 

supported the cuts to the Medicare Advantage. We also contract for 

Medicare Advantage. And we would willingly forego any revenue to 

get those changes in place to get affordable health care for our 

members. 

Dr. GINGREY. Let me ask you one last question in my remaining 

time. 


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I have seen recent reports that AARP supports the Senate Democratic version of health-care reform. One of the ways in which a 

Senate health reform bill pays for the reforms it seeks is through 

a payroll tax on all those making $250,000 or more each year. 

Unfortunately, this payroll tax is not pegged for inflation, meaning that it will negatively impact your members, including myself, 

aged 50 to 64 today, and over time cause those making well below 

$250,000 a year to pay this additional payroll tax of .5 percent, increasing the Medicare payroll tax from 2.9 to 3.4. 

Does AARP support the use of a payroll tax to pay for health 

care reform? 

Ms. CRAMER. We have not endorsed the Senate bill. We are 

working to get the age rating provision in the Senate bill. It does 

not meet what we would like to have. It is 3 to 1. We do not support that. And the Senate bill does not fully close the donut hole, 

which is our top priority. We have not—— 

Dr. GINGREY. Ms. Cramer, reclaiming my time, are you saying 

that you do not support the version of health-care reform in the 

Senate bill that raises a payroll tax a half a percent? 

Ms. CRAMER. I am saying that we have not endorsed the Senate 

bill as of this time. 

Dr. GINGREY. Again, I want to ask you specifically a yes-or-no 

question. As the chairman of the board of AARP, do you or do you 

not support increasing the payroll tax 0.5 percent to help pay for 

health-care reform, whether that is in the Senate version, the 

House version, or in a conference report that comes back to us later 

in the year or the 1st of the year? 

Ms. CRAMER. We believe that revenues will have to be raised to 

provide all Americans affordable health care. 

Dr. GINGREY. Last point in my remaining few seconds: Would 

you support a change in the final bill indexing this tax for inflation 

if, indeed, that increased payroll tax is in there? 

Ms. CRAMER. We have not discussed that. I cannot speak to that 

today. 

Dr. GINGREY. Well, I am disappointed that you can’t speak to 

that as being a responsible board member, volunteer board member, advocating on behalf of 40 million seniors to try to keep costs 

down. Because, clearly, this is not a partisan question; this is just 

an issue of doing the responsible thing on behalf of your membership. 

Mr. Chairman, with that, thank you for the additional time, and 

I will yield back. 

Mr. PALLONE. Thank you, Mr. Gingrey. 

Next is the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

And, Ms. Cramer, I appreciate AARP’s support for the Housepassed bill that doesn’t have the payroll taxes the Senate does. 

But, Dr. Schondelmeyer, you conducted the study that found the 

brand-name drug prices increased 9 percent in the last year. We 

heard a lot of criticism of that study by Dr. Vernon and Mr. Smith 

in your testimony. How do you respond to that criticism? Does your 

study present a true picture of what is going on with prescription 

drug prices? 

Mr. SCHONDELMEYER. I believe it does. 


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First of all, the price data we used are prices actually reported 

by the drug companies. And I would ask, if they are so concerned 

about those prices not being accurate, why are they reporting inaccurate prices in the market and to the price databases? 

Second, the Consumer Price Index is a very useful measure, but 

it measures a market aggregate only for the retail market. The CPI 

doesn’t even include most specialty drugs in the marketplace. And 

the CPI—and, by the way, I would correct another number people 

have thrown around, that drugs are 10 percent of our health-care 

expenditures. That is retail outpatient prescription drugs are 10 

percent. Drugs in all settings—in hospitals, in physician’s offices, 

and every other setting—are about 17 percent of the total national 

health expenditures. And yet we keep fooling ourselves saying they 

are only 10 percent. 

So I think our market basket reflects the full spectrum of drugs 

in the marketplace, in the places where they are used, and it is 

based on prices reported by the manufacturers. 

Mr. GREEN. They also say that your study does not take the discounts and rebates provided by drug manufacturers into account. 

Does that skew the results? 

Mr. SCHONDELMEYER. I have offered opinions that I don’t think 

it appreciably skews the results because I don’t see in the marketplace where consumers get the benefit of either those rebates or 

discounts. I have never met a consumer nor have I, myself, directly 

received a rebate from a drug company, and I have never met a 

consumer who says they have. 

Supposedly, the Medicare Part D plans do negotiate rebates, and 

it is supposed to either lower the premiums or the drug product 

price. But when the Office of the Inspector General for HHS evaluated Medicaid prices versus the Medicare prices back in 2007, he 

found that for brand-name drugs the Medicaid price was actually 

on average 0.6 percent lower than the Medicare prices before rebates were taken into account. When rebates under Medicaid were 

taken into account, it would have reduced the price by about 30 

percent, but those rebates don’t exist and aren’t paid to the government on the Medicare side. 

So they can have an impact, but the way they are implemented 

under Medicaid Part D, they don’t appear to get passed to the consumer or the taxpayer. 

Mr. GREEN. Well, I know we can look at the big picture, but prescription drug prices have increased at rates beyond the inflation 

rate in the last few years. 

Mr. SCHONDELMEYER. Absolutely. I have no doubt of that. 

Mr. GREEN. OK. 

Mr. Smith, your testimony states that Medicare Part D costs are 

not as high as projected, and I tend to think just because we created the donut hole, forcing seniors to pick up that majority of the 

tab of their prescription drug medications. Additionally, Medicare 

Part D plans—the Secretary of HHS cannot negotiate drug prices 

with manufacturers. This forces seniors in the Part D to pay much 

higher drug prices. Under H.R. 3962, the health care bill, we close 

that donut hole by 2019. 

A PhRMA statement from Senior Vice President Ken Johnson 

following the release of the AARP report on prescription drug 


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prices states, ‘‘What is more, AARP fails to mention that 50 percent 

discount that companies will provide to most seniors and disabled 

Americans who hit the so-called donut hole in Medicare Part D. 

That provision alone is expected to save beneficiary spending in the 

coverage gap as much as $1,800 in 2011.’’ 

My office has contacted many companies on behalf of our seniors 

who have entered into the donut hole, and these discounts are not 

guaranteed and should not be advocated as a benefit to seniors as 

a way to curb the cost of drugs. Now, we try to work with individual drug companies because we see the ads on TV just like our 

seniors does, but oftentimes they are not qualified for those discounts when they fall in that donut hole. 

Do you have information on how many companies provide such 

discounts to seniors in the donut hole and the average discount 

they provide? 

Mr. SMITH. Congressman, thank you for the question. 

I do not have information about the number of companies that 

provide discounts in the donut hole. I can say that, under the initiative that we undertook, all companies would be providing the 50- 

percent discount on brand drugs in the donut hole. 

Mr. GREEN. Well, I know the quote I gave you from Vice President Ken Johnson talked about $1,800. Believe me, I have seniors 

I talked to Friday in Houston that would love to have that because 

they fell in that donut hole. 

If you could get us more information from PhRMA on where they 

came up with that $1,800, I would really appreciate it, because I 

think all of us would like to make sure our seniors—because we do 

constituent casework, and that is our next option when they hit 

that donut hole, outside of eliminating the donut hole, as our 

health care bill does. 

Thank you, Mr. Chairman. I know I am out of time. 

Mr. PALLONE. Thank you, Mr. Green. 

The gentleman from Texas, Mr. Burgess. 

Dr. BURGESS. Thank you, Mr. Chairman. 

I think Mr. Shimkus’s questioning just a few moments ago really 

showed to us why this hearing should be on the Subcommittee of 

Oversight and Investigations where we can, indeed, swear people 

in, get them under oath, so that we get answers that we can depend upon, because we have heard some conflicting information 

today. 

I still remain troubled by the fact that we had PhRMA, AMA, 

AHIP, SEIU, AdvaMed down at the White House in May and June 

doing these deals, some of them, to be sure, part of the public 

record, but we don’t have the phone logs, we don’t have the e-mails, 

we don’t have the minutes from those meetings, and we are in the 

dark as to what was struck. 

So what I read in the newspaper is that PhRMA created an $80 

billion deal to help the health care bill get through. OK, that 

sounds like a good thing, but I don’t know what PhRMA gave up, 

I don’t know what the White House gave up. It is just difficult to 

evaluate that. 

And then, of course, you do have the Congressional Budget Office 

sitting back there and saying, ‘‘Wait a minute, if you are doing 


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something you should have been doing in the first place, we don’t 

actually score that as a savings.’’ So does that $80 billion decline? 

I would just like to point out, since I was criticized about the aspect of negotiation from the Secretary of HHS with Part D, I mean, 

the Congressional Budget Office—who we should have at this hearing, by the way; they should be here—but they sat at that very 

table last fall in a secret meeting that we had that wasn’t open to 

the press. The Congressional Budget Office reiterated that direct 

negotiation from the Secretary of Health and Human Services on 

Part D prescription drugs would not result in any significant savings. They have said this over and over again. I don’t know what 

we need to do to kill that notion, but it is one that certainly deserves to die. 

On the issue of the donut hole, Ms. Cramer, I will just ask you, 

if we did away with that, what would be the effect, the practical 

effect, on those very low-priced policies that are available to people? Now, in my State of Texas, I think there are some 40 policies 

that are available for Medicare Part D. What is the practical effect 

of those very low-cost policies if the donut hole goes away and essentially everything is the same? 

Ms. CRAMER. If I understand your question, I believe only about 

20 percent of the Part D drug plans provide coverage in the donut 

hole. And I believe, at that point, it is primarily for generic drugs. 

Dr. BURGESS. But a person does have that option to buy coverage 

that would provide coverage in the gap if they so chose. Is that correct? I mean, that happens today. There is no donut hole for that 

individual, is that correct? 

Ms. CRAMER. Well, that is correct. And, as I said, 20 percent—— 

Dr. BURGESS. But a person who doesn’t use much in the way of 

medications is free to purchase one of these very low-cost policies 

that costs a minimal amount each month. And if something happens during the course of that year, yes, then their out-of-pocket 

expenditure may not be covered, but they also do have a maximum 

catastrophic coverage above which their drug costs are covered. 

But because the way Part D is set up, next year in the open enrollment period, they may switch to one of those programs that provides coverage in the gap. Will we lose that flexibility if we go 

down this road of closing the donut hole, as has been outlined in 

the House bill? 

Ms. CRAMER. Well, I don’t believe so, Congressman. You know, 

our top priority is to completely close the donut hole because 26 

percent of people enter that donut hole; only about 3 to 4 percent 

really exit that. And during that coverage gap, you have heard the 

stories about what people do with their drugs when they don’t follow their drug regimen. So we think it is extremely important 

to—— 

Dr. BURGESS. Now, I need to interrupt you there for just a moment because there are other options. And my office certainly 

works with individuals on an individual basis, as Mr. Shimkus 

pointed out. There is the option, though—next year, during the 

open enrollment period, you don’t have to stay on that particular 

policy under which you have been covered previously that has allowed you to end up in the donut hole. There are policies that proVerDate Mar 15 2010 23:58 Oct 19, 2012 Jkt 074858 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 E:\HR\OC\A858.XXX A858

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vide coverage in the gap which would be available to that individual in the years ahead. 

I am going to have to move on because there is some other things 

that I just need to get asked. And, first off, Ms. Stoll, I have to ask 

you the name of that medicine for migraines, because I am just 

dying of curiosity. 

Ms. STOLL. Of course I won’t be telling you the name of that 

product. Maybe we can have a private chat later. 

Dr. BURGESS. See, this is why this has to be on Oversight and 

Investigations, because we could put Ms. Stoll under oath and she 

would be required to tell me the name of the medicine and I 

wouldn’t be left in the dark here. 

Ms. STOLL. I will leave my colleagues to do the paid advertising 

for specific drugs. But, you know, I just want to raise an issue 

about—— 

Dr. BURGESS. Well, hold that thought. We will talk about that 

privately, because I do have to get one last thought in to our two 

participants at the end. 

We talk about what may be a causal relationship and what may 

be a casual relationship. I do think it is important, and one of the 

things we can’t know at this hearing, because we don’t have access 

to all the information, we can’t know what is just a casual relationship between the $80 billion that PhRMA said they are going to 

give up and a causal relationship, ‘‘Hey, if we give up $80 billion, 

then we are going to be able to have price flexibility to make up 

some of that ground on something else.’’ We just don’t know. 

So where is the line drawn between what is a casual relationship 

and what is causal? 

Mr. SCHONDELMEYER. Well, that is more of a scientific or statistical question. But I think, just from a policy observational perspective, we have never seen drug prices go up this high in the last decade and a half. And this is a time when there is the most risk for 

drug companies—that is, having either price controls or a change 

in the market structure in a way that affects their prices. And so, 

it would be logical that they are looking for ways to buffer their 

revenue for as much as they can and as long as they can. 

Dr. BURGESS. Well, again, that is speculation. It would be better 

if we were all on the record and under oath. 

Let me just ask you one last thing. You said you have not seen 

a drug price go down. We did have Prevacid which went over-thecounter this past month, and the price drop has been dramatic, and 

it still sold under a brand name. 

Mr. PALLONE. Can we ask you to respond in writing? Because we 

have a number of Members, and we have a vote coming up. 

Dr. BURGESS. Mr. Chairman, with all due respect, I sat here 

while many of our panelists—and I appreciate them being here— 

went significantly over time. This is an important issue. 

Mr. PALLONE. I understand that the panel went over time, but 

I am trying to keep the Members to the minute. We are going to 

have a vote at 12:15. We have a lot of Members, so respond to us 

in writing, if you will. 

Next is Chairman Dingell. 

Mr. DINGELL. Thank you, Mr. Chairman. 

This question is to Mr. Schondelmeyer. 


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Mr. Schondelmeyer, I am not sure you or the panel members remember years ago but we made some changes in the food and drug 

law which banned the imports of pharmaceuticals which could not 

be certified as safe by the Secretary of HHS. Do you remember 

that? 

Mr. SCHONDELMEYER. Yes. I think that was back in the 1980s. 

Mr. DINGELL. So the law now says you cannot import pharmaceuticals unless they can be certified as being safe. Is that right? 

Mr. SCHONDELMEYER. I believe the law says that. It has not been 

implemented. 

Mr. DINGELL. That is what the law says. So pharmaceuticals can 

be imported, but they have to be certified as being safe. Is that 

right? 

Mr. SCHONDELMEYER. I believe that is the case. 

Mr. DINGELL. OK. Now, we have the nice problem that, if we 

change that, unsafe pharmaceuticals could be imported. Is that 

right? 

Mr. SCHONDELMEYER. It depends on your certification process 

and how good it is. 

Mr. DINGELL. Well, if the Secretary can’t certify that they are 

safe, they can’t come in. Isn’t that right? 

Mr. SCHONDELMEYER. Well, they may not be able to certify for 

political reasons or for practical reasons. 

Mr. DINGELL. Dear friend, I wrote the legislation. It didn’t say 

political reasons. It just says you can’t import them unless they are 

certified and safe. Are you in accord with that? 

Mr. SCHONDELMEYER. In what sense? 

Mr. DINGELL. Do you agree that that is good public policy? 

Mr. SCHONDELMEYER. I believe there are processes by which an 

appropriate certification process could be undertaken. 

Mr. DINGELL. Well, and I have no objection. But, up until now, 

they have not been able to do it. And I don’t want to engage in a 

great big toe dance here, I just want to get the record clear, because everybody is trying to reimport, and I am keep trying to tell 

them, ‘‘You can do so if the pharmaceuticals are safe and the Secretary can so certify.’’ And I just want to get that into the record. 

Am I correct in my appreciation on this matter or not? 

Mr. SCHONDELMEYER. I believe you are, but, again, I am not a 

lawyer. 

Mr. DINGELL. OK. Thank you very, very much. 

Now, I note several things here, and very quickly I would like 

to get them. There is no trap here, so just please give me a yesor-no answer. 

H.R. 2962 will provide assistance for millions of other Americans 

to ensure that they can afford prescription drugs. This would have 

a substantial impact on medical adherence. Is that correct? 

Mr. SCHONDELMEYER. I don’t know the bills by their number, as 

you have quoted it, so I can’t answer that, sir. 

Mr. DINGELL. All right. Now, H.R. 3962 will also close the donut 

hole. Is that not so, yes or no? 

Mr. SCHONDELMEYER. Again, I don’t recall the specific provisions 

of the bill. 


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Mr. DINGELL. I am not trying to trap you, I am just asking you 

facts. You are my expert here, and I would like to get your help 

on this thing. 

All right. Let’s go to Mr. Smith. 

With regard to H.R. 3962, it will provide financial assistance for 

millions of other Americans to ensure that they can afford their 

prescription drugs. Is this so or not? 

Mr. SMITH. Congressman, it provides assistance. Respectfully, as 

you know, we oppose the bill. 

Mr. DINGELL. Thank you. 

H.R. 3962 will also close the donut hole. Is that not so? 

Mr. SMITH. Same answer, Congressman. 

Mr. DINGELL. OK. 

Now, Ms. Stoll, if you please, we sometimes overlook the problems that confront millions of Americans with insurance that fails 

to cover adequate benefits and protection from financial bankruptcy. These are the underinsured. 

You mention a 60 percent increase in the number of underinsured from 2003 to 2007. Could you tell us what are the major 

causes for this jump? 

Ms. STOLL. Well, there are about 25 million underinsured. As we 

figure it, a major cause of that is lack of solid prescription drug 

coverage. A lot of plans in the individual market don’t cover prescription drugs. We will fix that with H.R. 3962, so I applaud that. 

Mr. DINGELL. Now, we include a number of important provisions 

in H.R. 3962 such as the minimum benefit package that includes 

prescription drug coverage, elimination of the annual and lifetime 

caps, assistance for premium and out-of-pocket costs. Would these 

provisions help address the problems of the underinsured? 

Ms. STOLL. Absolutely. 

Mr. DINGELL. Thank you. 

Ms. Cramer, if you please, I would like to highlight your comments on Medicare Part D, the donut hole, the point at which beneficiaries are responsible for the full cost of their prescription drugs. 

You state, ‘‘Under current law, the donut hole is projected to almost double by 2016 to more than $6,000. This means that Part 

D beneficiaries can find themselves paying the full cost of their 

drugs far longer in the future.’’ This is quite unsettling to me. 

H.R. 3962 provides a 50-percent discount on brand-name drugs 

in the donut hole, reduces the donut hole by $500 in 2010, and 

eliminates the donut hole entirely by 2019, and authorizes the Secretary to negotiate on behalf of seniors for lower drug prices in 

Part D. 

Give me your judgment. Are these steps sufficient to avert the 

substantial donut-hole growth that you have referred to by 2016 

and to provide necessary and needed relief for our seniors? 

Ms. CRAMER. Yes, Congressman, it completely closes the coverage 

gap. 

Mr. DINGELL. Thank you. 

Mr. Chairman, my time has expired, and I thank you for your 

courtesy. 

Mr. PALLONE. Thank you, Chairman Dingell. 

The gentleman from Pennsylvania, Mr. Murphy. 

Mr. MURPHY of Pennsylvania. Thank you, Mr. Chairman. 


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Dr. Schondelmeyer, do you have any research that is funded by 

NIH? Are you involved in any of the research funded by NIH? 

Mr. SCHONDELMEYER. No, I have not conducted research in the 

lab, which is primarily the type of research conducted by NIH. 

Mr. MURPHY of Pennsylvania. NIMH, National Science Foundation, anything of that sort? 

Mr. SCHONDELMEYER. I have had research funded by the Centers 

for Medicare and Medicaid Services. 

Mr. MURPHY of Pennsylvania. OK. When that is done, what percentage of that research is there to cover overhead costs? 

Mr. SCHONDELMEYER. What percentage—— 

Mr. MURPHY of Pennsylvania. What percentage of your research 

grant just funds overhead costs, do you know? 

Mr. SCHONDELMEYER. The University of Minnesota has a negotiated rate with the government—— 

Mr. MURPHY of Pennsylvania. How much? 

Mr. SCHONDELMEYER. —that is like 51 percent, I believe. 

Mr. MURPHY of Pennsylvania. So 51 percent is not involved in 

the actual research but it goes to the overhead? 

Mr. SCHONDELMEYER. That is negotiated between the government and the university. 

Mr. MURPHY of Pennsylvania. That is a standard, actually, for 

NIH grants, too, across the country, about 51 percent. As a matter 

of fact, I found it interesting that some universities, such as Harvard, have a 71 percent overhead rate; MIT, 67 percent; University 

of Minnesota is around 50 percent. It concerns me that so much 

money is set out to do actual research but over 50 percent goes to 

things that have nothing to do with research. 

Should we stop giving universities money for their overhead at 

these outrageous rates of nearly two-thirds or half or more that 

doesn’t even go to taking care of the things they are supposed to 

do? What do you think? 

Mr. SCHONDELMEYER. Well, first, as a mischaracterization, the 

51 percent overhead means about a third of the money goes to 

overhead. It is 51 percent on the direct—— 

Mr. MURPHY of Pennsylvania. With facilities and administrative, 

yes, we are paying for buildings. But I am just asking, should we 

cut that so that universities should only use their research money 

to go directly to research and not go to pay the things to run the 

university? What do you think? 

Mr. SCHONDELMEYER. No. Those overhead costs do pay direct 

costs that are—or indirect costs that are related to the cost of conducting that research. In fact, the University of Minnesota estimates—— 

Mr. MURPHY of Pennsylvania. A lot of the costs that the universities get in these things are not necessarily going to the research, 

which is helping save lives and develop new drugs, things like that, 

but we should keep paying that when it is not really going? I mean, 

some of it goes to a university president’s salary. Some of them 

make quite a bit of money, I understand. Should we stop doing it? 

Mr. SCHONDELMEYER. I am not a university president, so I don’t 

know what—— 

Mr. MURPHY of Pennsylvania. OK. All right. Well, we will just 

keep you within your line. 


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Ms. Cramer, on the AARP board of directors, you have responsibility of oversight over the insurance plans that AARP contracts 

with, some of these companies. Does AARP have a Medicare Part 

D plan? 

Ms. CRAMER. Yes, we do. 

Mr. MURPHY of Pennsylvania. And who do you contract that 

with? Or do you run it yourselves? 

Ms. CRAMER. With United Health Group. 

Mr. MURPHY of Pennsylvania. How much do they pay AARP in 

royalties or whatever you would call it to offer that plan? 

Ms. CRAMER. I don’t have that number with me. 

Mr. MURPHY of Pennsylvania. You are a member of the board. 

You just told me you have oversight over that. You tell me that 

something that is a massive amount of the income for AARP, you 

don’t know how much it is? 

Ms. CRAMER. I don’t know what portion is for the Part D plan. 

Mr. MURPHY of Pennsylvania. A dollar amount, you don’t know. 

Ms. CRAMER. Congressman, I have answered. I don’t know what 

portion is for the Part D plan. 

Mr. MURPHY of Pennsylvania. No, you haven’t answered my 

question. You said that over half of your income comes from insurance plans but you have no idea how much it is and you are on 

the board? I think you are chair of the board. And you are telling 

me you don’t know what kind of money AARP makes? I don’t understand that. 

Ms. CRAMER. Well, I have answered—— 

Mr. MURPHY of Pennsylvania. No. Well, let me ask another question because I am trying to get an answer to that. So do you have 

a donut hole in your plan? 

Ms. CRAMER. I am sorry? 

Mr. MURPHY of Pennsylvania. Do you have a donut hole in your 

Medicare Part D plan? 

Ms. CRAMER. Yes, we do. 

Mr. MURPHY of Pennsylvania. You do. And yet you make millions 

and millions and millions of dollars out of your Medicare Part D 

plan. Why don’t you use that money to fill the donut hole? 

Ms. CRAMER. Our plans operate under Federal and State laws 

just like any other plan does. 

Mr. MURPHY of Pennsylvania. But I am asking you, if Federal or 

State law allows you to have a plan that does not have a donut 

hole, why don’t you fill the donut hole with the profits you make? 

After all, you are a nonprofit organization. Why don’t you use that 

money—I understand your executive director makes how much 

money for AARP? 

Ms. CRAMER. I am sorry? 

Mr. MURPHY of Pennsylvania. How much does your executive director get paid per year at AARP? 

Ms. CRAMER. He doesn’t get paid what the Senate said he got 

paid. 

Mr. MURPHY of Pennsylvania. How much does he get paid? 

Ms. CRAMER. I would be glad to answer that offline. 

Mr. MURPHY of Pennsylvania. I don’t understand why we can 

talk about everybody else’s salaries but AARP’s. And you are here 

criticizing other companies. 


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Ms. CRAMER. It is around $800,000. 

Mr. MURPHY of Pennsylvania. It is my time. The drug companies—I am concerned about the cost of drugs, and I am concerned 

how much it costs people. But I want to get to the bottom of this. 

And so you have the cost of manufacturing the drug. You have the 

profits companies make. You have research and development for 

those drugs. You have advertising. I want to get to the bottom of 

that. But there is also the cost of administering plans. 

And AARP is not an innocent partner in this, because you also 

make a lot of money from this. And when I ask you how much your 

director makes, suddenly that is off limits. But we can talk 

about—— 

Ms. CRAMER. It is around $800,000. 

Mr. MURPHY of Pennsylvania [continuing]. How much money 

pharmaceutical companies make. I don’t know how much money 

AARP is putting into your pockets and how much is going to doing 

such things as eliminating the donut hole or reducing prices. What 

this committee needs to do is look at all of these levels. 

And I think it is disingenuous for AARP to come in here and say, 

‘‘When it comes to AARP, we are not telling you how much money 

we make or what we do with it,’’ or, for some reason, the chairman 

of the board doesn’t understand that stuff. When it comes to talking about—— 

Ms. CRAMER. Congressman, I believe our—— 

Mr. MURPHY of Pennsylvania. No. When it comes to talking 

about these prices, everything should be on the table. 

I am deeply concerned about senior citizens who cannot afford 

drugs. I am deeply concerned about members of AARP who cannot 

afford drugs. But you are telling me a lot of this goes into your 

profits, you won’t tell me how much your executives make in salaries, and you won’t close your own donut hole. 

And I yield back the balance of my time. 

Ms. CRAMER. Congressman, I believe our—— 

Mr. MURPHY of Pennsylvania. I yield back the balance of my 

time. If you are not going to answer my questions, you don’t have 

a right to answer. 

Ms. CRAMER. And the executive director’s salary—— 

Mr. MURPHY of Pennsylvania. Mr. Chairman, she is not going to 

answer my questions. 

Mr. PALLONE. Look, if she wants to answer the question—— 

Mr. MURPHY of Pennsylvania. Mr. Chairman, she has told me 

she doesn’t have the answers to these questions that I have asked. 

Mr. PALLONE. Ms. Cramer, if you would like to answer, you can. 

Ms. CRAMER. Well, as I said, I believe our audited report moments ago was entered into your record, which would include the 

information the congressman is asking. And also the 990, which is 

public document, would include information on our executive director’s salary. I also said that it is around $800,000 per year. 

Mr. MURPHY of Pennsylvania. Why don’t you use that money to 

close the donut hole? 

Mr. PALLONE. She tried to answer your questions as best she 

could, and we do have the documents that were entered into the 

record by Mr. Shimkus. 


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We have about—I guess we still have another 13 minutes or so, 

so I would like to get a couple more people in. Mrs. Capps is next. 

Mrs. CAPPS. Thank you, Mr. Chairman. 

And I want to spend most of my precious 5 minutes on the topic 

of medications used to treat cancer. But I want to give you a 

chance, Ms. Cramer, to talk 1 more minute or less, hopefully less, 

on the donut hole. Because, in your written statement, you reference AARP’s donut hole calculator. Just to get it on the record 

for today’s discussion, would you very briefly tell us what that is? 

Ms. CRAMER. It is a new online tool that became effective in July. 

It is found at donuthole.aarp.org. It helps individuals calculate and 

track their out-of-pocket expenses. It helps individuals locate 

cheaper alternatives for their condition. It provides a personal 

medication record. And it also provides personalized letters; if individuals decide they want to pursue cheaper generics, it helps them 

begin the conversation with their doctor. 

It is extremely popular. We have served over 180,000 people 

since it came online in July. That is a thousand people a day. 

Mrs. CAPPS. Thank you very much. 

There was an article in the New York Times this weekend, a 

pretty disturbing one, about the high cost of drugs treating cancer. 

And it reported that a new medication called Folotyn is going to 

be sold for about $30,000 a month. 

Now, for the record, drug companies should be able to make a 

profit. We need a profitable and successful domestic pharmaceutical industry. 

But I am going to ask you, Mr. Smith, what good do breakthrough treatments do when they are unattainable for almost all 

the people who need them most? Is there any point at which your 

industry simply says, ‘‘No, we can’t charge this much’’? 

Mr. SMITH. Congresswoman, drugs absolutely need to be accessible for them to do good. That is one of the reasons that we are 

trying to, you know, help support a health reform bill. 

So, you know, in terms of this particular issue, I don’t know anything about this drug, I don’t know this company. But what I can 

say is that there are certainly cases where there are high-cost 

drugs, and these medicines—you know, patients need high-cost 

medicines at times, just like they need high-cost hospitalization—— 

Mrs. CAPPS. Let me ask you—go ahead. 

Mr. SMITH. And part of what we do with insurance is spread the 

risk across the entire population for the few people who need highcost services. 

Mrs. CAPPS. Well, this is a pretty big risk for a few people whose 

lives are hanging by a thread. 

Here is the shocking part of the story, as it was reported in the 

newspaper. The drug hasn’t even been shown to increase the life 

expectancy of those who take it. If a manufacturer is going to 

charge $30,000 a month for a drug, I would think that they would 

want to be able to show that it at least helps patients live a little 

bit longer. 

Now, you have answered, and I want to use whatever time, and 

it is only 2 minutes, to see if others on the panel would like to respond to this particular issue, either using this story or one other 


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one. But I am focusing particularly on life-threatening diseases 

that are lumped together as cancer and the way the cost of treatment has gone up. 

Dr. Schondelmeyer, you might want to speak to it or maybe Ms. 

Stoll, too, as well. 

Mr. SCHONDELMEYER. Sure, I would. First of all, I did not see 

that article in New York Times this weekend. I will go back and 

look for that. 

In our own study, the 12 cancer drugs that we had in the specialty area, those 12 drugs all went up in price, and the price increase in 1 year ranged between 4.9 percent up to as much as 20.8 

percent increase in price in a single year. And then that compounds 

over time, of course, as prices keep going up. 

I think the point you raise is one of, we have to assess what is 

the real margin of value that a drug adds to society. And I am 

going to shift away from a cancer drug, but I think it is the same 

principle. A drug called Zetia, which is supposedly used for cholesterol, we recently found that that drug really is not as effective as 

we thought and not as effective as an old drug that is very inexpensive even though it has a slight, small convenience-type side effect 

perhaps. But Zetia, itself, was able to raise their price dramatically 

in the marketplace even though it is not even effective. 

Mrs. CAPPS. Let me see if Ms. Stoll—what do you think we 

should do now? How can this legislation of health reform address 

this particular egregious issue? 

Ms. STOLL. Well, there are a number of drugs that are expensive 

like this one in the New York Times article. I think part of the answer is, again, we need to get everyone into the system; we need 

to have a pooled program where we are sharing costs. Not everyone 

is going to need these expensive drugs. We need prescription drug 

coverage with annual and lifetime limits. And we need special and 

lower limits for low-income people to protect them so that their access to this drug and other drugs like it are not limited. 

And I think that is where you find, in this sort of back and forth 

between good and bad today, some common ground among all of us 

in wanting to see that everyone is in the system and has out-ofpocket protections so they can have access to drugs. 

Now, drugs should be evaluated to make sure they bring more 

value and new value to what is already on the marketplace. 

Mrs. CAPPS. Thank you very much. 

I yield back. 

Mr. PALLONE. We have 7 minutes left. I would like to get Mr. 

Buyer in, if that is OK. I am assuming that the other Members will 

come back after the votes. We have four votes. 

Mr. Buyer. 

Mr. BUYER. I have two questions of two different witnesses, one 

of Professor Vernon. I want to you think about this. And then I 

have some questions of Ms. Cramer. 

In my opening statement, I made some comments regarding the 

impact of price controls in the European Union that has been part 

of your studies. And now that you have had a chance to examine 

H.R. 3962 and some of the price controls and the comparative effectiveness that is in that bill, I want you to talk a little bit further 

about the potential impact of those controls upon drug pricing and 


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whether it has a positive or negative impact upon public health. 

OK? 

Secondly, Ms. Cramer, I would like for you to respond—number 

one, I would like to know whether AARP, whether your organization has produced requests or received any estimates about how 

much additional revenue per annum will be created to your organization by H.R. 3962. That is number one. 

Number two, I also would like to know whether your organization had any contact with this committee, any contact with this 

committee, or their staff relative to the sweetheart deal that you 

have in Section 102 of H.R. 3962. Most insurance plans are required to have a medical loss ratio of 85 percent. However, this bill 

that passed the House allows Medicare supplemental insurance 

plans, such as AARP’s Medicare supplemental insurance plan, to 

have a medical loss ratio of 65 percent. I would like to know whether or not your organization had any contact in the advocacy of that. 

And I will give you a chance to respond. 

Professor. 

Mr. VERNON. Thank you, Congressman. 

I would begin by saying, you had referenced my study with Professor Golec at the University of Connecticut regarding the exodus 

of R&D investment from Europe to the U.S. That is certainly true. 

I mean, we have seen regulations of pharmaceutical prices in the 

EU become more stringent, the U.S. now being largely the only 

price-unregulated market for pharmaceuticals in the world. And, 

certainly, you know, the prize in terms of both basic research, 

which could be done globally, but specifically later-stage research, 

large clinical trials, and, you know, marketing networks, as well as 

a familiarity with how to get through the FDA process has resulted 

in a lot of R&D leaving Europe and coming to the U.S. And, as a 

result, we have seen a dramatic change in the levels of R&D comparing the two markets. 

And then, also, generally speaking, regarding the legislation, any 

attempt, implicit or explicit, to control drug prices—there have 

been bills on reimportation, technology assessment, and perhaps 

negotiated drug prices—does represent a very serious threat to the 

incentives to undertake R&D. And, to be frank, it is remarkable, 

research by economists at Yale and the University of Chicago have 

shown that the benefits of pharmaceutical innovation and medical 

innovation have been astounding and far exceed the levels of investment and the cost of that investment, suggesting we should be 

doing more medical research, more pharmaceutical research, because the benefits exceed the costs. 

Now, that being said, I am not denying the fact that cost-containment measures would benefit consumers of existing medicines that 

are on the market. It would make them more affordable, improve 

access and utilization, and improve health. But I think we have to 

consider that cost and that benefit, and specifically that benefit of 

lower-cost medicines today, with what it would mean for the rate 

of innovation in the future. And I think the latter is an order of 

magnitude greater than the former, based upon the empirical research out there. 

Mr. BUYER. All right. Thank you. 

Ms. Cramer. 


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Ms. CRAMER. The answer to both of your questions is no. We 

have not, to my knowledge, had any estimate of revenues that 

AARP would lose or gain under House bill 3962. And I have 

checked with staff; to my knowledge, there has been no contact 

with the committee looking at the medical loss ratio we advocate 

on behalf of members. 

Mr. BUYER. The Congressional Budget Office has said that H.R. 

3962 will result in fewer people enrolled in Medicare Advantage— 

‘‘fewer’’ really is 3 million—and more people enrolled in Medicare 

Part D. 

Isn’t it true that the vast majority, probably up to 80, 90 percent, 

of people enrolled in Medicare Part D by a supplemental insurance 

policy, such as the AARP Medicare supplemental insurance plan offered by United Health Care? 

Ms. CRAMER. Are you asking me? 

Mr. BUYER. Wow. Who else would I be asking? 

Ms. CRAMER. Well, Congressman, I don’t work for United Health 

Care, so I don’t know that I can answer that question. 

Mr. BUYER. Well, I find it really hard to believe—well, first of all, 

there is going to be a tremendous shift to supplementals which you 

offer. And I cannot believe that you run an organization that you 

have never really calculated what the potential income flow to your 

organization will be. That is really, really surprising to me. 

I guess you are just trying to guard yourself in exchange for 

questions about why you endorse the overall packet, but I think it 

is now obvious. 

I yield back. 

Mr. PALLONE. Thank you. 

Now, we are going to have four votes on the floor, maybe half an 

hour, a little more. I am assuming that some Members are going 

to come back. So, if you would wait, we would ask you to wait. And 

the subcommittee will stand in recess. 

[Recess.] 

Mr. PALLONE. The subcommittee will reconvene, and I will ask 

the witnesses to come back to the table. I don’t think we will be 

much longer. Thank you for bearing with us. 

Next is the gentlewoman from the Virgin Islands, Ms. 

Christensen. 

Ms. CHRISTENSEN. Thank you, Mr. Chairman. I didn’t have an 

opening statement, so let me thank you for holding this hearing. 

As a physician, I am, of course, well aware of the key importance 

that pharmaceutical companies have made to the advances which 

have made and will continue to make in our health and health 

care. Overall, Americans, including the patients I have served over 

my lifetime, are living longer with better quality lives because of 

the products that the companies have created. 

Unfortunately, that is not true for all. Although Medicare Part 

D has made a substantial improvement, people of color, the elderly, 

disabled and the poor continue to not be able to afford medications 

that they need to keep them healthy, despite some of the free and 

discount programs. 

I know that medication costs are not the only cause of increasing 

health care spending. I am also not against profits. And most definitely I support the research and development which has resulted 


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in better lives for all of us. But I do not discount the AARP report 

either, as it tells a true story of people across this country who cannot afford to take all their medications every day as prescribed. So 

I don’t think we should make light of that report at all. 

I will start with Ms. Cramer on my first question. AARP pays a 

critical role in advocating for its membership for seniors and really 

for everyone one in health care, retirement security, and things 

that all of us care about. I would assume the membership dues 

alone don’t support these activities. 

Is it safe to say that the royalties we have heard so much about 

this morning are used to make important services available to your 

members and to fund advocacy efforts on issues that even some of 

those companies that are paying with those royalties may not agree 

with AARP on? 

Ms. CRAMER. Yes, that is safe to say. We often have disagreements with the providers, but the royalties do support AARP—our 

education, our advocacy, our member engagement—not only in 

Washington, D.C., but as you know, with the 53 State offices in the 

Territories and the States. 

Ms. CHRISTENSEN. And we thank you for the support that AARP 

has given to the Virgin Islands. 

Mr. Smith and Professor Vernon, this is on pricing, so I can understand this better. At the point at which generics come on the 

market, has the brand-name producer generally recouped their cost 

to research and develop those products, and if so, why then do the 

costs continue to go up after that point, especially in excess of what 

the inflation is? 

I ask that because when we see the new technologies come on 

the market, they are usually really expensive. And after a few 

years their prices go down. But it is the opposite for pharmaceuticals. Can you explain that for me? 

Mr. VERNON. Madam Congresswoman, first, I would say that recent research undertaken by myself suggests that only two out of 

every ten pharmaceutical products that reach the market generate 

after-tax present value returns in excess of average R&D costs. I 

would also say we have very intense generic competition at patent 

expiration for very large, successful products. 

The price of generics is driven very rapidly down to the marginal 

manufacturing cost of pharmaceuticals. We have the most competitive, lowest price, highest utilization rate of generics in the world, 

very successful as a result largely of the Waxman-Hatch Act. 

I would also say that there is some uncertainty whether pharmaceutical prices have indeed been rising as fast as has been purported in this hearing. 

And also I would add one more point, and that is that the suggestion that firms are raising prices in anticipation of health care 

reform is not at all clear. Certainly, the most comparable recent 

legislation to the current legislation was the Clinton Health Security Act, where we saw firms pledging publicly—that got them in 

trouble with the FTC—to restrain drug prices. 

There are other factors like compressed product lifecycle cash 

flows as a result of patent challenges, intensified generic competition, that could be driving what we are observing in the pricing of 

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ceuticals, a shift towards more-costly-to-develop biologics, which 

have higher prices, versus fewer pharmaceuticals. 

Ms. CHRISTENSEN. Well, it may be 12 years, we hope, but 

wouldn’t you expect to get back what you have put into R&D and 

begin to make a profit in that period of time? That is what we are 

assuming. 

I just wonder why the prices keep going up when a product has 

been on the market for years; technology has the same kind of competition, but their prices go down. 

Mr. VERNON. Well, I think there are a lot of dynamic factors, and 

certainly the market is very different now. As I said, we have much 

more intensive generic competition; we have a higher rate of patent 

challenges; we have lower productivity with respect to pharmaceuticals; and we are seeing more biologics on market, which have 

a higher financial cost of capital and higher manufacturing costs. 

So we are seeing that mix shift between pharmaceuticals and biologics. 

Ms. CHRISTENSEN. Let me try to get another question in to Ms. 

Stoll and Dr. Schondelmeyer. 

I will acknowledge that our health status in this country would 

not be where it is were it not for the investment in research and 

development that the pharmaceutical countries make, although it 

would be a lot higher and better if all of us were able to participate 

in access to those drugs. 

Do you believe there has to be a tradeoff between research and 

development and lowering the cost to consumers? Research and development always is what comes up when you talk about lower 

costs. 

Mr. SCHONDELMEYER. I believe there is a tradeoff we are making 

already, but we are not doing it very consciously. We are doing it 

more implicitly rather than explicitly. 

In America we may generate much of the R&D for the world that 

finds new medicines, but we probably have a higher percentage of 

our population as a developed country who don’t have access to 

medications than any other developed country, and so that is why 

our health status overall is down around 20th instead of at the top 

of the list. 

So we are making that tradeoff already and some people are paying the price. Others derive the benefit of the wonderful medicines 

that are discovered. 

Mr. PALLONE. We are going to have to stop, only because I can’t 

allow the others. 

All right. 

Ms. CHRISTENSEN. Thank you. 

Mr. PALLONE. Thank you. 

The gentleman from Maryland, Mr. Sarbanes. 

Mr. SARBANES. Thank you, Mr. Chairman, and I appreciate you 

all coming back or staying while we came back. 

Dr. Schondelmeyer, is the cost of R&D something that is accounted for before the profit numbers or something that happens 

with the profits? 

Mr. SCHONDELMEYER. As I understand the way drug companies 

keep their books and the profits they report to Wall Street, R&D 

has already been costed out at that point. 


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Mr. SARBANES. Right. So we are looking at profits of $51 million 

in 2008 and a 19 percent return on revenue, and since 2005, $180 

billion in profits. This is after the R&D. So that makes this kind 

of R&D justification for where the pricing is less compelling to me, 

if I am understanding sort of how the books are kept on that. 

I have to say, Mr. Smith, I know you can’t comment on the motives, but I have no doubt that the pharmaceutical companies are 

running up the price in anticipation of health reform, based on past 

experience with them doing that. We see it also happening with the 

health insurance industry. There is evidence that the premiums for 

next year’s renewals have been sky high with the recent notices 

that have gone out. 

The disappointing thing with the—I guess it cuts both ways. I 

am disappointed maybe that the health insurance industry didn’t 

make a deal the way PhRMA did, but I am disappointed that 

PhRMA, having made a deal, appears to be price gouging in anticipation of what is coming so they can establish a new baseline. 

My question was, ‘‘the deal,’’ as it is referred to, I guess, was 

about $80 billion. Is that represented by the 50 percent discount 

that is expected to be offered to people in the doughnut hole, or 

does that account for some other things as well? 

Mr. SMITH. Congressman, as I mentioned earlier, I didn’t come 

prepared today to testify about ‘‘the deal,’’ but at a broad level the 

industry’s contribution towards the cost of health reform would include the 50 percent discounts in the coverage gap. 

As you know, both bills—both House and what we see in the 

Senate—include very substantial increases in the Medicaid rebate, 

very substantial extensions of the Medicaid rebate across to much 

broader a population than it applies to today, beyond the currently 

uninsured population that would become eligible for Medicaid. 

As you know, the Senate bill includes some other fees, and as 

you know, both bills include provisions to create a pathway for follow-on biologics. It also comes with a pretty sizable government 

score. 

Mr. SARBANES. I would hope the contribution that PhRMA is 

willing to make would increase in relationship with the change in 

the baseline on the drug pricing that is appearing to occur right 

now. In other words, if at the time the deal was made, the pricing 

was here, and that meant that a 50 percent contribution to the cost 

in the doughnut hole at that pricing represented this amount of 

money, then if the pricing is going up substantially, then the 

amount needed to cover a 50 percent discount would also go up; 

and beyond that, the amount needed to get you back to the anticipated discount for the consumer would even be more. 

So I just hope that PhRMA is ready to stick with the deal it 

made in terms of the effect or the benefit it would have on the consumer in relationship to the increase in the baseline that seems to 

be occurring as a result of, again, what I view as a kind of price 

gouging scheme in these last few weeks and months. 

With that, I will yield back. 

Mr. PALLONE. Thank you. 

Let me thank all of you for coming today. This is not an easy 

issue. The way it works is, members can still submit written quesVerDate Mar 15 2010 23:58 Oct 19, 2012 Jkt 074858 PO 00000 Frm 00133 Fmt 6633 Sfmt 6633 E:\HR\OC\A858.XXX A858

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tions through the clerk. I think the clerk is supposed to get back 

to you within 10 days or so. 

So we still may get additional written questions. I know that a 

number of you said you were going to respond in writing to some 

of the questions that were asked by the members as well. But, in 

any event, we do appreciate you coming. 

Dr. BURGESS. Mr. Chairman, can I ask unanimous consent—we 

are up against the clock here at the end of the year, and to the extent possible, could we have these written responses within 5 days 

so we would have an opportunity to evaluate those before we get 

into this ping-pong match with the Senate with whatever they are 

going to do at the end of the year? 

Mr. PALLONE. The way the rules are, we usually have 10 days 

for Members to submit the questions and then we send them to the 

witnesses. I don’t think 5 days is enough time. 

I would ask that you get back to us fairly quickly, but I don’t 

want to put a date on it because I think it depends on how complex 

they are. But please get back to us as quickly as you can, once you 

get the questions. 

Dr. BURGESS. Mr. Chairman, further inquiry: I think you would 

acknowledge it is unlikely this health care bill is going to go to a 

conference. 

Mr. PALLONE. If it is passed by the Senate by the holiday, we 

will probably go to conference in January. It all depends on when 

the Senate passes it. But the intention is to go to conference. I 

don’t know how we could avoid that, given there are probably going 

to be major differences. 

Dr. BURGESS. The way we would avoid it is, your Speaker would 

say we simply have to accept what the Senate does, and we acquiesce to the Senate bill by the end of the year. 

Mr. PALLONE. You know, Dr. Burgess, I can’t predict that. Everyone is saying there will be a conference. I think it is likely that 

there will be. 

Dr. BURGESS. Well, I am depending upon you as my subcommittee chairman to advocate that there be a conference and 

that it be a real conference. 

Mr. PALLONE. You do not have to worry about my advocating for 

a conference. I will advocate for a conference, I assure you. 

Dr. BURGESS. The same way you advocated for a subcommittee 

markup. 

I yield back. 

Mr. PALLONE. I guess we are done. Without objection, this subcommittee is adjourned. 

[Whereupon, at 1:28 p.m., the subcommittee was adjourned.] 

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