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FEHBP’S PRESCRIPTION DRUG BENEFITS: DEAL OR

NO DEAL?

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

JUNE 24, 2009

Serial No. 111–11

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

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERRY E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

——— ———

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

——— ———

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF

COLUMBIA

STEPHEN F. LYNCH, Massachusetts

ELEANOR HOLMES NORTON, District of

Columbia

DANNY K. DAVIS, Illinois

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio, Chairman

WM. LACY CLAY, Missouri

GERRY E. CONNOLLY, Virginia

JASON CHAFFETZ, Utah

JOHN M. MCHUGH, NEW YORK

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

BRIAN P. BILBRAY, California

WILLIAM MILES, Staff Director

(III)

C O N T E N T S

Page

Hearing held on June 24, 2009 ............................................................................... 1

Statement of:

Kichak, Nancy H., Associate Director for Strategic Human Resources

Policy Division, U.S. Office of Personnel Management; Rear Admiral

Thomas J. McGinnis, Chief, Pharmaceutical Operations Directorate,

Tricare Management Activity, Office of the Assistant Secretary of Defense, Health Affairs; and John E. Dicken, Director, Health Care, Government Accountability Office ..................................................................... 68

Dicken, John E. ......................................................................................... 85

Kichak, Nancy H. ...................................................................................... 68

McGinnis, Thomas J. ................................................................................ 73

McFarland, Patrick E., Inspector General, U.S. Office of Personnel Management; Susan A. Hayes, founder of Pharmacy Outcome Specialists;

and James G. Sheehan, Medicaid inspector general, New York State

Office of the Medicaid Inspector General .................................................... 23

Hayes, Susan A. ........................................................................................ 31

McFarland, Patrick E. ............................................................................... 23

Sheehan, James G. .................................................................................... 43

Needleman, Dr. Jack, associate professor in the Department of Health

Services of the UCLA School of Public Health; Dr. Ralph de la Torre,

president and CEO, Caritas Christi Health Care; and Mark Merritt,

president and chief executive officer, Pharmaceutical Care Management

Association ..................................................................................................... 112

de la Torre, Dr. Ralph ............................................................................... 126

Merritt, Mark ............................................................................................ 138

Needleman, Dr. Jack ................................................................................. 112

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

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 60

de la Torre, Dr. Ralph, president and CEO, Caritas Christi Health Care,

prepared statement of ................................................................................... 128

Dicken, John E., Director, Health Care, Government Accountability Office, prepared statement of ........................................................................... 87

Hayes, Susan A., founder of Pharmacy Outcome Specialists, prepared

statement of ................................................................................................... 33

Kichak, Nancy H., Associate Director for Strategic Human Resources

Policy Division, U.S. Office of Personnel Management, prepared statement of ........................................................................................................... 70

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

of Massachusetts:

Prepared statement of ............................................................................... 21

Prepared statement of Change to Win .................................................... 3

Prepared statement of the National Community Pharmacists Association .......................................................................................................... 11

McFarland, Patrick E., Inspector General, U.S. Office of Personnel Management, prepared statement of .................................................................. 25

McGinnis, Thomas J., Chief, Pharmaceutical Operations Directorate,

Tricare Management Activity, Office of the Assistant Secretary of Defense, Health Affairs, prepared statement of ............................................. 75

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

Management Association, prepared statement of ...................................... 140

Needleman, Dr. Jack, associate professor in the Department of Health

Services of the UCLA School of Public Health, prepared statement

of ..................................................................................................................... 115

Page

IV

Letters, statements, etc., submitted for the record by—Continued

Sheehan, James G., Medicaid inspector general, New York State Office

of the Medicaid Inspector General, prepared statement of ....................... 45

(1)

FEHBP’S PRESCRIPTION DRUG BENEFITS:

DEAL OR NO DEAL?

WEDNESDAY, JUNE 24, 2009

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL

SERVICE, AND THE DISTRICT OF COLUMBIA,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 3:03 p.m., in room

2154, Rayburn House Office Building, Hon. Steven Lynch (chairman of the subcommittee) presiding.

Present: Representatives Lynch, Cummings, Connolly, and Norton.

Staff present: William Miles, staff director; Aisha Elkhesin, clerk;

Jill Crissman, professional staff member; Jill Henderson, detailee;

Daniel Zeidman, intern; Jennifer Safavian, minority chief counsel

for oversight and investigations; Dan Blankenburg, minority director of outreach and senior advisor; Adam Fromm, minority chief

clerk and Member liaison; Ashley Callen, minority counsel; and

Molly Boyl, minority professional staff member.

Mr. LYNCH. First of all, I’d like to apologize for the lateness of

our hearing. There are some strategic maneuvers being undertaken

in the House for other reasons than the flow of legislative business,

so we are expecting that there may be some interruptions in the

hearing.

What I would like to do is to not have that affect your appearance here, or the value of your testimony. So if there are any disruptions, we will try to ask Members to go and vote and come back

while we continue the hearing. That is the theory, anyway. But let

me first call this subcommittee hearing to order.

The Subcommittee on the Federal Workforce, Postal Service, and

the District of Columbia will now come to order. Welcome Ranking

Member Chaffetz and members of the subcommittee hearing, and

all witnesses and those who are in attendance.

Today’s hearing will examine the Federal Employees Health Benefits Program, Drug Benefit, and the impact that the lack of pricing

transparency has on the Office of Personnel Management’s ability

to evaluate the overall value of those benefits. The hearing will

also discuss alternative pricing and contracting methods for the

FEHBP’s prescription drug benefit. The Chair, the ranking member

and subcommittee members will each have 5 minutes to make

opening statements, and all Members will have 3 days to submit

statements for the record.

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At this time, I would like to ask unanimous consent that the testimonies from Change to Win, and the National Community Pharmacies Association, be submitted for the record. Hearing no objection, it is so ordered.

[The prepared statement of Change to Win follows:]

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[The prepared statement of the National Community Pharmacists Association follows:]

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Mr. LYNCH. Again, because of the irregularities on the floor, we

are going to proceed with as many Members as we have available.

First of all, I would like to welcome all of our witnesses, and the

fellow Members who will attend, eventually, as we examine this

prescription drug benefit in the Federal Employees Health Benefits

Program.

I would also like to thank all of today’s witnesses for sharing

their insight and expertise on this complex issue. I understand that

several of you have come from quite a distance to be here with us

today, and I deeply appreciate your willingness to help the subcommittee gain a better understanding of how the Federal Employees Health Benefits Program prescription drug benefit is structured

and priced.

The Federal Government is currently facing one of its largest policy issues to date, health care reform. This issue affects everyone

and many challenges must be addressed in the upcoming months

to find the right solutions. Many policymakers look to the Federal

Employees Health Benefits Program as a model for providing

health care. That is why it is important to ensure that the program

is providing the best quality in benefits at the best price.

Entitled, ‘‘Federal Employees Health Benefits Program Prescription Drug Benefits: Deal or No Deal,’’ we have called for this afternoon’s hearing to examine the contracting method used to deliver

prescription drugs to the 8 million Federal employees, their dependents and annuitants and the Members of Congress, and their

families that are covered under this program. Considering that prescription drug costs make up close to 30 percent of our program

premiums, we need to do all we can to ensure that Federal employees, and the taxpayers, are getting the best value for their dollar.

Astonishingly, limited reviews or analyses have been performed

on this increasingly expensive benefit, but that will change, starting today. For the most part, the Federal Employees Health Benefits Program Health Plans, contract with pharmacy benefit managers to price and provide the pharmacy benefit to Federal Employees Health Benefits Plan members.

In contrast with other Federal health programs, the Federal Employees Health Benefits Plan does not regulate or negotiate drug

pricing for its members. Instead, it relies on the competition among

various carriers and pharmacy benefit managers to keep prices low.

However, as we will hear today, prices are not low. In fact, when

comparing the Federal Employees Health Benefits Program drug

prices to that of other Federal programs such as the VA and the

Department of Defense, Medicare, Medicaid and the Public Health

Service 340(b) Program, we will hear that along with the Medicare

Part D, FEHBP is paying substantially more for its drugs than the

other Federal programs.

Now some research even shows that COSTCO and DrugStore.com offer better prices for drugs than the Federal Employees

Health Benefits Program. That is in spite of the fact that the Federal Employees Health Benefits Program has the buying power of

8 million members. That is especially troubling. In these economically challenging times, we shouldn’t be asking Federal employees

and the American taxpayer to accept this. If the Federal Employees

Health Benefits Plan wants to remain a model for providing health

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benefits, legislative changes that allow for alternative prescription

drug benefit contracting and pricing are in order.

The key question we hope to explore today is, why is the Federal

Government, and therefore the taxpayers, paying such different

amounts for the same drug. And I am not an expert on pharmaceutical pricing, but I have a hunch that the pharmaceutical industry charges what they can to make the largest profits.

For the first 6 months of 2006, the 10 largest drug manufacturers enjoyed profits of close to $40 billion. So, do I think that the

pharmaceutical industry could afford to charge lower prices for our

Federal employees? I certainly do. As chairman of this subcommittee, I am committed to providing the best benefits to our Federal

employees at the best price. And we in Congress have asked a lot

of taxpayers in the last few months to help us out with that very

function.

We have a responsibility to make sure every dollar that is spent

is necessary and is providing the greatest benefit. Again, I thank

all of those in attendance, and I look forward to hearing from today’s witnesses.

Normally I would yield to Mr. Chaffetz. I will, of course, afford

every courtesy to Members as they arrive. So even though we may

have to skip forward in the proceedings, I will certainly recognize

the ranking member, and my other colleagues as they do arrive.

It is this committee’s policy that all witnesses submitting testimony to this subcommittee are to be sworn. May I please ask you

to rise and raise your right hands?

[Witnesses sworn.]

Mr. LYNCH. Let the record indicate that the witnesses have answered in the affirmative. Your entire written statement will be entered into the record. You don’t have to worry about that. However,

during your oral testimony the green light before you in that little

box indicates you have 5 minutes to summarize your statement.

The yellow light means that you have 1 minute remaining to complete your statement, and the red light indicates your time for remarks has ended. So we will proceed with the testimony.

Let me first offer brief introductions of our first panel of witnesses, who again, I appreciate your attendance. Mr. Patrick

McFarland was nominated Inspector General of the Office of Personnel Management in 1990. As Inspector General, Mr. McFarland

is responsible for providing leadership, that is independent, nonpartisan and objective, and is dedicated to identifying fraud and

mismanagement in programs administered by the Office of Personnel Management. Mr. McFarland is also a member of the Counsel

of Inspectors General On Integrity and Efficiency.

Ms. Susan Hayes is the founder of Pharmacy Outcome Specialists [POS], with 28 years of experience in the health consulting and

management industry. Before founding Pharmacy Outcome Specialists, she was a vice president of marketing for Systemed Pharmacy, Inc., and vice president of marketing for Walgreens

Healthcare Plus. Ms. Hayes was the national practice leader for

William M. Mercer, Inc., specializing in prescription drug auditing

and bid procurement, amounting to over $1 million annually in revenue.

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Our next witness, Mr. James Sheehan, has served as New York

State Medicaid inspector general. He has been the associate U.S.

attorney for civil programs in the Eastern District of Pennsylvania.

Mr. Sheehan has focused on health care fraud since 1987, having

personally handled, or directly supervised, over 500 health care

fraud matters from 1999 to 2006. Mr. Sheehan led the Federal

Government’s investigation in a case against Medco Health Solutions, which resulted in the recovery of over $155 million, as well

as substantial business changes to protect patients and pharmacists.

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

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Mr. LYNCH. Already, I am being asked to vote. Having no other

Members here that might be able to do this while I vote, I am

going to have to ask you to just hang in there, relax. I will be back

momentarily. Thank you. We are in a brief recess.

[Recess.]

Mr. LYNCH. This hearing of the subcommittee is now reconvened.

We will hear from each of our witnesses. Mr. McFarland, you are

now recognized for 5 minutes for your opening statement.

STATEMENTS OF PATRICK E. McFARLAND, INSPECTOR GENERAL, U.S. OFFICE OF PERSONNEL MANAGEMENT; SUSAN A.

HAYES, FOUNDER OF PHARMACY OUTCOME SPECIALISTS;

AND JAMES G. SHEEHAN, MEDICAID INSPECTOR GENERAL,

NEW YORK STATE OFFICE OF THE MEDICAID INSPECTOR

GENERAL

STATEMENT OF PATRICK E. McFARLAND

Mr. MCFARLAND. Mr. Lynch, Ranking Member Chaffetz and

members of the subcommittee, good afternoon. My name is Patrick

McFarland. I am the Inspector General of the U.S. Office of Personnel Management. I want to thank you for inviting me to testify at

today’s hearing, and especially for recognizing the significance of

pharmacy manager contracts and their lack of price transparency

in the context of the Federal Employees Health Benefits Program.

I am pleased to be appearing with my fellow panelists. Mr.

Sheehan is particularly well-known to my office, as we had the

privilege of participating in a number of health benefit fraud cases,

some of which addressed instances of wrongdoing by PBMs, that he

conducted during his tenure as the associate U.S. attorney in the

Eastern District of Pennsylvania.

We found both his expertise on these matters and his leadership

in complex, high-value cases to be unparalleled. Similarly, key

members of my staff, who are responsible for auditing the Federal

Employees Health Benefits Plans, and their PBMs, have attended

training programs conducted by Ms. Hayes’ firm. They speak very

highly of the training.

The FEHBP is the largest employer-sponsored health insurance

program in the United States. During calendar year 2008, the 266

insurance plans under contract to the FEHBP provided health insurance coverage to approximately 7.7 million persons, representing Federal employees, annuitants, and dependents. The Federal

Employees Health Benefits Program paid a total of $35.9 billion in

premiums to these carriers. As reported to OPM, by FEHBP carriers, pharmacy costs reflected more than 25 percent of health care

costs paid by the fee-for-service plans.

According to data furnished by OPM’s contracting office, 12 different PBMs provided services to one or more FEHBP plans during

2008. My office has been addressing PBM issues from both an

audit and investigative prospective since 2003. We were initially

concerned that the health and safety of persons covered by the

FEHBP may have been placed at risk by certain practices of PBMs.

As a result of our timely law enforcement efforts, we addressed

and resolved these concerns without direct harm to FEHBP-covered

persons. At this time, we have no information which suggests that

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PBMs under contract with the FEHBP are operating in a manner

that would compromise the well-being of covered persons. However,

the prior violations are a strong reminder that the potential for

safety risks to subscribers exists through poorly written contacts,

lack of adequate industry oversight and the need for additional internal controls.

Currently in my office’s estimation, the single-most important

issue involving the PBMs, is that their contracts with the FEHBP

carriers are not transparent, and do not reflect the actual costs of

drugs to the PBM. My office is committed to providing the oversight needed to protect the integrity of FEHBP and the integrity

of its enrollees.

Thank you again for inviting me here today. I will be happy to

answer any questions.

[The prepared statement of Mr. McFarland follows:]

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Mr. LYNCH. Thank you, Mr. McFarland.

Ms. Hayes, you are now recognized for 5 minutes.

STATEMENT OF SUSAN A. HAYES

Ms. HAYES. Good afternoon, Chairman Lynch and members of

the Subcommittee on Federal Workforce. I want to thank you for

the opportunity to testify in front of you and answer your questions

this afternoon.

My name is Susan Hayes and I am a principal with Pharmacy

Outcomes Specialists. In preparing my testimony today, I examined

the problems encountered by Federal and State governments when

contracting for pharmacy benefits. I see three major issues. Let us

take these issues one at a time.

The pricing of prescription drugs is overly complex and hidden to

purchasers, designed to confuse plan sponsors, and in turn, disadvantage plan sponsors in the negotiation process. Prices of prescription brand drugs, are based on discounts off Average Wholesale Price or AWP. The source of AWP pricing is primarily two

pricing guides, which may charge as much $25,000 per year to subscribe to obtain AWP prices.

AWP prices may change on a daily basis and are complicated by

the fact that a single drug may have over 50 prices due to different

strengths, package sizes and manufacturers. As a result, plan sponsors, such as OPM, have to pay exorbitant amounts, or hire auditors such as POS, to determine if they have been charged correctly

and in accordance with the discount arrangements with their

PBMs.

Prices for generic drugs are even more secretive. Each PBM sets

a MAC list, Maximum Allowable Cost, which is closely guarded,

which is not routinely given to clients and for which auditors must

sign stringent non-disclosure agreements to obtain. MAC prices

may vary by the day, the pharmacy or between clients of the same

PBM. In fact, each PBM may have over 50 different MAC lists. Auditing these prices are complicated, even for the most experienced

auditors, and impossible for plan sponsors.

Contracts between PBMs and plan sponsors, even the largest

plan sponsors such as OPM, do not adequately disclose when PBMs

realize revenue, and as a result, disadvantage plan sponsors in the

negotiation process. In a recent decision, the First Circuit Court of

Appeals observed: ‘‘The health benefit provider often has no idea

that a PBM may not be working in its interests. This lack of

awareness is the result of the fact that there is little transparency

in a PBM’s dealings with manufacturers and pharmacies.’’

Essentially, these contracts do not disclose the following: one,

there are additional moneys or margins, perhaps as much as 5 percent of the drug spend, that are retained by PBMs; two, often as

much as 50 percent of drug manufacturer rebate payments are

never passed back to plan sponsors, but are retained by the PBM.

PBMs come up with different names for these rebates, such as cost

effectiveness rebates, formulary rebates and market share rebates,

and then the PBM determines how to divide up the pie of rebate

and retain what they want and pass back to plan sponsors what

the PBM thinks that the client expects, without the client knowing

that there is more; three, patient drug histories and physician preVerDate 11-MAY-2000 12:24 Aug 26, 2009 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 U:\DOCS\51394.TXT KATIE PsN: KATIE
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scribing patterns are routinely sold to drug companies for profits

by PBMs without physicians, patients or plan sponsors’ knowledge

or approval and without compensation by the plan sponsor or patient.

The lack of transparencies in PBM contracting is exacerbated by

PBM’s resistance to disclose this information, disclosure of public

information, even when the disclosure is required by State sunshine laws. For example, one PBM has brought at lease 11 separate lawsuits seeking to block the release of its contract covering

public employees in Texas, even after the Texas attorney general

issued legal opinions in each instance, stating that the PBM contract at issue should be released as a public document.

Contracts between PBMs and plan sponsors, limit plan sponsors’

ability to audit these contracts and disadvantage plan sponsors

from verifying if contract terms are met. Among the most insidious

of these terms is mutually acceptable auditor. For Caremark,

Medco and ExpressScripts, who together control a majority of the

market, a mutually acceptable auditor, may be one that is not experienced with rebate contracts, AWP sources or PBM policies and

procedures, or ones that are too expensive for most plans to afford.

Chairman Lynch, I was surprised to see that your invitation letter to me stated that Federal costs for pharmacy benefits are 30

percent of total health care spending. Normally, I would see pharmacy costs as 20 percent of total health care, and I would conclude

that your program is really, no deal.

I am hopeful that the Government will reform its contracting

processes in the upcoming rebidding of several FEHBP plans, and

I’m asking for the following measures: full transparent contracting

for PBM services; pricing terms that are clear; AWP brand pricing

information becoming readily available to plan sponsors; and PBM

forced to publish MAC pricing for generics; rebate payment sources

and types of rebate payments received by PBM fully disclosed; data

selling of any kind associated with health care product spending or

pharmacy data, should require the explicit approval of plan sponsors, physicians and patients; and that the plan sponsor selection

of a qualified auditor should not be routinely thwarted by PBMs;

and all plan sponsors should have the ability to fully audit all aspects of the PBM contract.

One again, I thank you for the opportunity and will entertain

any questions you have.

[The prepared statement of Ms. Hayes follows:]

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Mr. LYNCH. Thank you, Ms. Hayes.

Mr. Sheehan, you now have 5 minutes.

STATEMENT OF JAMES G. SHEEHAN

Mr. SHEEHAN. Thank you, Chairman Lynch, and members of the

subcommittee for the opportunity to speak to you here today.

I also want to join, and I also really appreciate the opportunity

to speak with Inspector General McFarland, who I have dealt with

over a number of years, and is a leader in the Inspector General

community, both on professional standards on these prescription

drug issues.

What I would like to talk to you about today is my two experiences. One is in doing health care fraud cases with the Inspector

General of OPM, where we were looking historically at what had

happened within the OPM program and ended up recovering close

to $300 million from the companies and requiring major changes

in their business practices.

And the second set of experiences in New York State, working

with the Unitary System, where we would have one payer for prescription drugs and one data base that allows us to look at what

is going on with the patients across the board. And I guess, like

a lot of your witnesses, I have a five-point plan which I am going

to do in 4 minutes.

The first part is, it seems to me OPM needs access to and a plan

for use of integrated patient claims data, which includes drug data.

We are going to talk today about costs and pricing, but the most

important information about prescription drugs in addition to their

costs, is what happens to the patients who take them. Do they experience better outcomes? Do they suffer adverse events? What is

the cost to the patient? And assist them with those adverse events.

If you have these things parceled out through your, whatever

number of plans that it is, over 100 plans, you are not going to

have that data available to do the kind of analysis to see what the

benefit is to the patient, and what the potential harms are, and

kind of costs you are incurring for the drugs themselves and for the

adverse events.

In New York State, we are a national leader in Medicaid data

management, and in fact, most of the State Attorneys General who

have worked on the drug cases, have used New York’s data as their

gold standard, to see what is actually happening. The same opportunity exists with OPM, it could be the gold standard in terms of

data. OPM is a lot more experienced with drugs and drug payments than any other agency in the Federal Government, with the

possible exception of the DOD.

The second issue is to take a look at identified drug risks, and

there is data available to do that. That is laid out in my written

comments. The third issue is focusing on drug pricing. Drug pricing

within OPM’s Health Plans was based, during the time I was working on reviewing it, upon percentage discounts off of average wholesale price, known in the trade as, ain’t what is paid, and negotiated

by the experience-rated plans with relatively little OPM oversight.

The net prices that we saw OPM paying, significantly exceed the

net prices paid by State Medicaid programs, by DOD, and in certain cases, the programs which are run by private companies, like

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HMOs, that didn’t appear to be a reason for that. The Federal supply schedule, as you will hear later, works very well with DOD,

and could be used in the OPM context as well.

The fourth issue that I would like to focus on is coordination of

benefits between OPM plans and Medicare Part D plans. At the

moment, one of the issues that we have seen in New York is you

have to go very carefully to look at what, since Medicaid is the

payer of last resort, and in certain circumstances OPM may be.

Who has first responsibility for these charges and what kind of

prices should they be charged?

And we have begun in the last year to obtain access to billing

and payment information from those PBMs. I know the DOD is

doing the same thing. I know OPM has the same potential. We

have seen it is a significant dollar potential to recover. And also

what happens to the patients is they may end up missing out on

the doughnut hole if it is properly treated.

The fifth issue that I would focus on, is one Ms. Hayes raised,

which is the choice of auditor and access to subcontractor PBMs.

When you have a 100 plus plans, it is very hard to audit all of

them. And when I was working with OPM on the contract side, it

was very hard to figure out who the specific plans were, what specific subcontractor was used in each case. And each contract was

different. So you needed a different auditor with a different set of

information, and they were very aggressive at attempting to block

certain auditors who were knowledgeable from looking at the program.

When I look at these programs with OPM, I believe there is significant opportunities for cost savings on prescription drugs

through improvements in OPM operations, and a consolidation of

the PBM contracts that exist. And as important, there are opportunities for better patient outcomes, more appropriate prescribing

and reduced adverse events through integration and medical claim

and diagnostic data, with pharmacy data maintained by the PBM

subcontractors.

Thank you very much, Mr. Chairman, for the opportunity to

speak today.

[The prepared statement of Mr. Sheehan follows:]

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Mr. LYNCH. Thank you, Mr. Sheehan. I now yield to myself 5

minutes.

Let me ask, we handle the purchase of our acquisitions through

DOD and other entities, much differently than we do the purchase

of pharmaceuticals. Maybe this is naive of me, but why wouldn’t

we just make the purchase of pharmaceuticals subject to the normal regulated acquisitions process?

Mr. MCFARLAND. That is, as a matter of fact, one of our suggestions that we are able to do that. We have certain proposals that

we offer. One would be to have the Federal regulation changed in

the FEHBP Act by Congress, of course, so that the PBMs would be

considered subcontractors, rather than providers.

Because right now, they are really in concert with a doctor or a

small pharmacy as a provider. And, in fact, they, multibillion dollar

corporations, that are operating in a manner that we think would

be certainly reasonable to have them considered a subcontractor.

And by virtue of doing that, we would have the transparency that

we need, and we would have the detail. We would get as close as

possible to the actual cost. But short of that, that is the situation.

Mr. LYNCH. OK. Ms. Hayes, do you have any thoughts on that,

about following this payment system and acquisition system

through the Federal Acquisition Regulations?

Ms. HAYES. Well, I agree with Mr. McFarland and his position

that these prices should be available to OPM and the Federal employees. Again, I think that even if AWP, Average Wholesale

Prices, is used as the basis, pricing should be available to the public so that AWP information can be monitored routinely, rather

than having it so secretive, and having it be bought, and really not

have this information available. So I agree that Federal employees

should get the same pricing as DOD and other Government agencies. But even if that isn’t taken, I think that AWP and certainly

MAC pricing under generic, should be available to the public to understand what those costs are.

Mr. LYNCH. Mr. Sheehan.

Mr. SHEEHAN. The difficulty that we encountered was the requirement for statutory change, and that did not appear to be likely to happen in the near future.

Mr. LYNCH. OK. Let’s see, I still have a minute and a half left.

In trying to dig down and understand this whole process. It is unbelievable the needless complexity of this whole system. It is built

to thwart oversight. It is built to introduce as much complexity into

the system as it possibly can. It is a scam of major proportions.

There is no reason that this health plan should have to operate

like this. It is a disgrace. And in this day and age, when we are

trying to save billions of dollars to fund this health care reform,

this is an area that absolutely has to be cleaned up. This is a mess.

It is shameful what is going on. And it is going to take a while,

but we are going to get to the bottom of this. We are going to

change this system. I promise you. So that is about all I have for

time on this pass, but I will gladly recognize the gentle lady from

the District of Columbia, Ms. Eleanor Holmes Norton, for 5 minutes.

Ms. NORTON. Thank you, Mr. Chairman, and what a find you

have before us here. I am trying to understand just as you are, how

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we could have taken this route. Let me try to cut to the chase, Mr.

McFarland. If you were looking at this system, wouldn’t you have

to conclude that OPM simply patterned its own drug program for

Federal employees on what the Federal Government was doing in

the private sector. Isn’t this simply the attempt to recreate what

that program, and how that program was structured?

Mr. MCFARLAND. To recreate the private sector?

Ms. NORTON. The program for non-Federal employees, I am asking whether this is not simply an imitation of that program?

Mr. MCFARLAND. Well, my feeling about that, Ms. Norton, is that

in 1959 when the Federal Employees Health Benefits Act was

passed, it was very clear, very concise as to what was expected of

OPM. Basically, OPM has stuck very close to that and not tried to

go outside of any reasonable bounds, inasmuch as——

Ms. NORTON. Well, let me challenge you on that. Let me ask you,

whether or not this program is modeled on similar programs already in the Federal sector? Like the program established for decades now for veterans. Wasn’t there a clear precedent as to how to

go about doing this?

Mr. MCFARLAND. What the Veterans Administration is doing,

seems to be a very expeditious way of doing it, and that is one of

our suggestions, that we might want to look at operating from

the——

Ms. NORTON. Well, I am challenging you Mr. McFarland, when

you said, all they did was try to follow what they have been doing.

It seems to me, what the Veterans Administration is doing is more

closely related to what one would have expected of the Federal

Government. Here we had a brand new humongous program, the

first thing you look for is, do I have something to guide me. Here

you have a Federal agency, that has been doing it forever, you put

that aside and proceed. I don’t understand why that precedent was

not relevant.

Mr. Sheehan.

Mr. SHEEHAN. Yes, ma’am.

Ms. NORTON. Do you believe that precedent should have anything to do with what was happening here, or was there no analogy

between the Veterans Program and this program?

Mr. SHEEHAN. We explored the Veterans Program and the Medicare Part D Program, and the OPM Program. I think that Inspector General McFarland is correct, that what has happened is that

the model that was used was the private sector model. But, many

major companies are doing a better job now in identifying these

costs and controlling them and dealing with them than we are in

the Federal Government.

Ms. NORTON. I recognize this. If you look at our FEHBP, it deals

with individual plans, and they do the negotiation. I don’t remember people coming back saying they weren’t getting a good deal. Is

the reason that they don’t come back and say they are not getting

a good deal, because of oversight by OPM, Mr. McFarland? We

have not had this complaint, so far as I know, among the FEHBP

health programs, that you say is the model for this program.

Mr. MCFARLAND. We, in our office, exercise our audit and our

criminal investigative efforts in this regard all of the time. This is

what we do the most of in the health care that services the Federal

54

Government. So, I am not quite sure the best way to answer your

question, because all of our efforts are going toward resolving these

conditions. And we have our options and suggestions that we are

providing to OPM for consideration.

Ms. NORTON. Well, we appreciate your work, and if the chairman

will bear with me for just one more question. Understand we are

trying to see what is appropriate for oversight here for the agency

to do. I don’t recall hearing of complaints about people who were

pressured to move from one insurer to another.

But yet in this situation, there have been complaints of quite unusual, at least in the Federal sector, actions such as pressure to

move one’s prescription from a pharmacy to the larger pharmacy.

I don’t recall that in FEHBP we have had that kind of situation

occur, and I wonder if you have seen that, and what you think of

that and what can be done about it?

Mr. MCFARLAND. Well, certainly when the health carriers negotiate their contracts with the PBMs what they are attempting to

do is get the best price for the prescription drugs. And they are——

Ms. NORTON. But the reports are that, in some cases, the cost to

consumers has risen significantly. There wouldn’t be any complaints, sir, if the same kind of economies of scale you get from

mega stores were available here. But there have been complaints,

and I am trying to find out what went awry here and what we can

do about it. Because it is new in that system as far as I can tell.

Mr. MCFARLAND. Well, first of all, what it would take would be

Congress to amend the FEHP Act so that certain things, such as

you are suggesting can happen, and there can be more economies

of scale.

Ms. NORTON. So you would recommend that?

Mr. MCFARLAND. Yes.

Ms. NORTON. Yes, sir.

Mr. MCFARLAND. That is one of our considerations. Yes.

Ms. HAYES. I would recommend that. One of the things that you

asked was, is this patterned after private industry? And a lot of my

clients are private industry. One of the things that private industry

would never do, is divide up their negotiation power over 100 different contracts. OPM divides up their negotiation power over 100’s

of different contracts through health insurers, to the PBMs. And

private industry would never do that. Private industry would use

whatever leverage it had with its number of employees with one

given PBM.

Ms. NORTON. Why don’t they do that, Mr. McFarland? Isn’t that

really economies of scale? You are the biggest player in the market,

that is what you have going for you. Why aren’t you using that

strength? Why aren’t we using that strength the way the Veterans

Department uses that strength?

Mr. MCFARLAND. Ms. Norton, the situation, as I see it, is somewhat simplified. And that is that from the beginning, in 1959, the

FEHBP has operated by not going outside of bounds. They have a

certain clarity that they are trying to stay within those bounds, as

far as dealing with providers. They basically don’t do that. They

have contracts, OPM has contracts with 266 health carriers at the

present time. And the health carriers then devote their time negoVerDate 11-MAY-2000 12:24 Aug 26, 2009 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 U:\DOCS\51394.TXT KATIE PsN: KATIE
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tiating contracts with PBMs. PRMs, in turn, negotiate their time

with——

Ms. NORTON. Mr. Chairman, I won’t take up more time, but I do

want to say, your testimony then is you do not believe they had the

power to do that? Are you saying——

Mr. MCFARLAND. Well, they do not have the power without

Congress——

Ms. NORTON [continuing]. That they did not have the power to

do what the Veterans Administration does, use the leverage of the

Federal Government to reduce the costs to Federal employees, and

that if we want that to happen, we should change the law? Is that

your testimony?

Mr. MCFARLAND. If you change the law, or OPM can do the Federal regulation change——

Ms. NORTON. That is a very important ‘‘or.’’ That is a very important ‘‘or,’’ Mr. Chairman. Or if OPM was interested in looking at

the system, a brand-new system for us, in terms of getting the best

deal, they do have the regulatory power to do so?

Mr. MCFARLAND. Yes.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. LYNCH. Thank you.

Let me ask, sort of following up on Ms. Holmes Norton’s question, we have a plan that represents 7.7 million people, a lot of

buying power there. In your own experience, do you feel like we are

using that leverage to demand the best deal. Sort of the title of this

hearing, Deal or No Deal. Are we getting a good deal, Mr. McFarland? Do you feel, based on the leverage, that we should have with

7.7 million participants and the position that we have?

Mr. MCFARLAND. We are concerned, Mr. Chairman, that we

probably are not getting a good deal. There is a good chance that

we are not getting a good deal, because of the lack of transparency.

And when I say lack of transparency, I want to be more specific.

We can’t find out information such as the incentive pay, the rebate

pay, volume discount pay, administrative fees. We can’t find that

information out because we can’t audit that. It is not available to

us now.

Mr. LYNCH. Right.

Mr. MCFARLAND. We can carve out something from the FEHBP,

specifically the prescription drugs. We can carve that out and go

after that. And then we have a tremendous amount of enrollees to

make a difference. You are correct.

Mr. LYNCH. Do you want to comment on that? It is very difficult

to conduct an audit on this system. I am talking about professional

auditors going in there, because all of this stuff is so opaque, and

it has been made so complex. There has been a deliberate attempt

to build a system that is not auditable, and they have basically created that. It is a very frustrating situation here.

In this hearing process, what I am trying to do is to figure out

whether we can introduce transparency on the existing system, or

simply blow it up. Blow up the system, put them under the Federal

acquisition regulations. Whole new ball game, because I am tired

of this going on, where our auditors can’t go in there. I can’t even

figure out the costs of manufacturing it, what their markup is,

where the rebates are going.

56

You would think that the entity that actually generates the

usage and the volume of these pharmaceuticals would earn the rebates themselves. I think, based on the evidence that we have had

in so far, about 50 percent of the rebates go somewhere else. Maybe

they go to the PBMs or some other groups, but they are not coming

back to these Federal employees. And that is totally unacceptable.

So I am trying to figure out whether it is better to try to fix this

system, and I am not so sure it is. Because the complexity is there

and it may take too long to do some of these things. It may be better to just simplify things, get it into an existing system, and let

it all shake out there. And that system requires transparency. Your

own thoughts, Mr. McFarland?

Mr. MCFARLAND. Yes, when I answered before, this is exactly

what I was getting at when I said it will take a change by the Congress. And we can carve out something that could be done, but it

would take an amendment from the Congress. What we also can

do, is the FAR regulation could be done by OPM, and they could

do that and allow us to get in and take advantage of it like DOD

does and Veterans Administration, Public Health Service and the

Coast Guard.

Mr. LYNCH. Right. One of the other frustrating parts of this is

the Average Wholesale Price or the MAC, the Maximum Allowable

Cost. It is tough to dig down and figure out what the hard numbers

are in terms of what we are being charged for 7.7 million beneficiaries. But I do have the ability to compare system to system,

and when I look at the VA system that I am involved with, it looks

like they are getting a discount from the Average Wholesale Price

of somewhere between 55 and 65 percent. That is the discount I

am seeing at the VA.

Now I have 7.7 million Federal employees, and I would say the

average discount they are getting maybe 12 to 15 percent, somewhere in that range. Now I could understand if there were comparable discounts here, if one was at 45, the other one is at 55. But

going from 60 percent to 12 percent, it just amplifies the sense that

the Federal employees are getting a raw deal on this plan.

I have exhausted my time. If I could allow you to answer though,

there are only a few Members here so I am sure everybody will be

given ample time. Ms. Hayes do you have anything, in terms of

comparing system to system? You have a lot of experience in this.

I thought your written testimony was very powerful, and I thought

you spoke very plainly, and the little bit of testimony from the professional side, that I could actually understand, and I appreciate

that. Your sense of whether or not there is a way to drill down here

and get this system into one of fairness on behalf of the Federal

employees?

Ms. HAYES. Well, again, with what Mr. McFarland said, you have

over 200 different health insurers subcontracting under 200 different PBM contracts. They all have different contracts. And,

again, that creates chaos.

Mr. LYNCH. Yes.

Ms. HAYES. And you may have one contract that has one different list for generic drugs and another contract with the same

PBM that may have another list for generic drugs, and they are all

on different pricing. I agree that if OPM got Federal pricing, it

57

would give a level playing field. I think the other issue is transparency and disclosure. You have to understand pharmaceutical

money that passes between drug companies to PBMs to plan sponsors. And that whole process needs to be 100 percent transparent.

That has to be 100 percent transparent.

Mr. LYNCH. I agree.

Ms. HAYES. Money is being kept by the PBMs on your behalf,

that should be going back and making those prices close to the

Federal pricing. That is why you have a difference between a 12

percent discount and a 50 to 60 percent discount with the VA. That

difference is, in part, rebate money that is not being passed back.

Mr. LYNCH. OK. Mr. Sheehan, same question.

Mr. SHEEHAN. I look at the system and I compare it with New

York’s system, and first, there is the breaking down into the 200

separate plans. But the second piece is, between the PBMs and the

Federal system, there is yet another set of players, and that is the

health plans.

And in the absence of OPM saying, this is what we expect, this

is what we want, this is how we are going to pay, they have their

own interests as an organization. So when we did our investigation

of Medco, we found there were significant dollars changing hands

from the drug companies to the health plans, and from the PBMs

to the health plans, in ways that didn’t show up in the reporting

to OPM.

So there is a financial interest in these plans, which is separate

from running an experience-rated plan, where you just pass the

cost through. And so, it seems to me, that they should take control

of the process, whether it is going to be a Federal supply schedule

process or contracting across the board, that is an issue for the

Congress to decide and not for us, but I think by letting it just happen, you are missing out on the opportunities at two separate levels.

Mr. LYNCH. Well, there might have been a day when we could

afford that; that day has long since passed, and we have to try to

maximize our savings here. At this point, I will yield. Mr.

Cummings, would you like 5 minutes?

Mr. CUMMINGS. I don’t have any questions, thank you, Mr.

Chairman.

Mr. LYNCH. OK. Ms. Holmes Norton for 5 minutes.

Ms. NORTON. No, thank you, Mr. Chairman.

Mr. LYNCH. OK. Well, I have a lot more questions in my own

mind. The problem at the pharmacy benefit manager level is so

complex with the markup on the drugs themselves, the handling of

rebates, whether they keep them, whether they give them to the

end user, the employees, it seems to be a very mixed bag. And,

again, the level of complexity goes not only to the drug manufacturer, but also very much to the PBM, or Pharmacy Benefit Manager.

Now, I haven’t tried to really grapple with those entities on a

one-to-one sort of basis, but what do you think about a PBM accountability act or some type of Pharmaceutical Benefit Manager

Accountability Act, where you require transparency, you require

those entities to operate in an open and understandable manner

58

with their clients, and open themselves up to an auditing process

so that we can understand what the heck is going on at that level?

Mr. SHEEHAN. Chairman Lynch, if I could take a crack at that?

Mr. LYNCH. Sure.

Mr. SHEEHAN. I have investigated, I think, all the major PBMs

over the last 10 years, and to some degree, the problem is that

PBMs are like Larry the Cable Guy. That you may get a great offer

today, but by the time they get the box in your house and you have

to sit and wait for them, switching is very difficult, and there aren’t

that many places to switch to. So the question is, how do you make

sure that the PBMs do what you need them to do, after the contractual relationship exists.

And it seems to me, that is a classic situation for regulation by

Congress and by outside entities. You are not going to be able to

negotiate anything in the contractual process, because your clout,

once the contract starts and you have x-million patients or x-hundred thousand patients in the system, is very little.

Mr. LYNCH. You are saying, let us use the rebate situation. If we

mandated that PBMs pass on the rebates to the end user, or 80

percent or 90 percent, when you say you have to tell them how to

operate.

Mr. SHEEHAN. It gets more complicated than that, and there are

contracts like that. The difficulty was, about 10 years ago, the companies started to do that, and what happened was everything that

used to be a rebate got called something else. It was a data fee.

Mr. LYNCH. Yes. Right.

Mr. SHEEHAN. It was a thank you very much for visiting our facility fee. So part of it is making sure that in the contractual process there is a regulation that says, here is what the expectations

are, and here is the minimum floor you have to meet. Otherwise,

if you are a PBM, the trick is to, like Larry the Cable Guy, offer

stuff on the front end. Then you are in the relationship. It is very

hard to find out whether you got it, which is why the regulatory

process is important.

Mr. LYNCH. OK. Ms. Hayes, did you have something to add on

that?

Ms. HAYES. I do. As Mr. Sheehan said, once you get into the relationship, the auditors come in, and auditors have been thwarted by

the PBM industry in every effort possible, to make sure that the

contractual obligation that the PBM has to its plan sponsor is actually being upheld.

For example, when we go in and do rebate audits, that do not

involve litigation, we have to go there and copy down every single

line of every single contract, between the pharmacy benefit administrator, the PBM, and the drug manufacturer, because—I’m not

sure why. Even though we are under very strict confidentiality

rules, we have to copy down every single line of these very complex

contracts. Some of the contracts are 5, 6 inches deep.

Mr. LYNCH. Yes.

Ms. HAYES. And so for us to copy down contracts that they have

with drug manufacturers, not being able to take those to our offices

and audit them in a normal manner that one would expect an auditor under confidentiality agreements to do, is very burdensome.

And because of that, plan sponsors neither have the human reVerDate 11-MAY-2000 12:24 Aug 26, 2009 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 U:\DOCS\51394.TXT KATIE PsN: KATIE
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source ability or the financial ability to actually conduct these audits.

So PBMs go into this contracting mode, and they will contract,

like Larry the Cable Guy. I love that analogy. They will go in and

contract what they think the clients will expect, knowing full well,

that the plan sponsor will never have the ability to actually audit

these agreements properly.

Mr. LYNCH. Yes. I agree. I have only had limited experience with

a couple of the health benefit plans that I had worked with as an

attorney, but it seems as though many of the contracts are structured in a way that, by virtue of their density and length, defends

against the risk of being read by anyone.

Ms. HAYES. Or understood.

Mr. LYNCH. Let alone an auditor. I think that the auditing piece

here is problematic as well. In just reviewing what has gone on,

there has also been a very, I think, concerted effort to either compromise the auditors or mystify them and bring in folks who really

aren’t equipped or able to conduct a valuable audit. And so they

are often frustrated in their own efforts, and they end up giving a

rather favorable review, probably with the hope of getting more auditing work.

So it is almost as if we need to clean that system up as well, and

have certain parameters to make sure we are getting lucid and

thorough audits on these audits that we do request. And I know

there has been a game played with the contractual language of mutually agreed upon auditor, which has frustrated many of these

plans in getting an auditor in. Sometimes these delays can go on

for a couple of years, where the parties can’t agree on an auditor

because the drug companies, or the PBMs, are taking advantage of

that language. But I don’t want to monopolize the time.

Mr. Connolly, from northern Virginia, you are recognized for 5

minutes.

Mr. CONNOLLY. I thank the chairman and forgive me for coming

late, I have been on the floor for a series of fascinating votes. Mr.

Chairman, I would ask, without objection, that my opening statement be entered into the record at this point.

Mr. LYNCH. Without objection.

[The prepared statement of Hon. Gerald E. Connolly follows:]

60

61

Mr. CONNOLLY. I thank the Chair. And let me ask our panelists,

do you agree with the OPM Inspector General’s suggestion that the

lack of transparency is a fundamental problem with PBMs acquisition of prescription drugs? And did you encounter similar problems

with PBMs changing prescription drugs at pharmaceutical companies’ behest or PBMs over-billing FEHBP carriers? Are those fair

criticisms in your view?

Mr. SHEEHAN. Let me take one of those that I think we have addressed, which is the issue of switching prescriptions. Both Medco

and CareMark, through advanced PCS subsidiary, signed agreements in 2004 and again in 2005, agreeing to limit the switching

activity that they would engage in. And I would defer to my colleagues at the OPM as to the compliance with that, but it has been

pretty good. That is not universal throughout the industry. So that

piece, has been at least addressed in the short term through litigation.

The second piece though, which is the transparency on pricing,

is still a huge problem and Ms. Hayes has talked about the audit

side of that, but it is a problem just across the board, because it

is very hard to figure out whether it is the retailer or the mail

order pharmacy, or the PBM that is responsible for making sure

the transparency occurs.

Mr. CONNOLLY. Ms. Hayes.

Ms. HAYES. Well, I would agree that transparency is a huge

issue.

Mr. CONNOLLY. Ms. Hayes, I can’t hear you.

Ms. HAYES. I am sorry. I would agree that transparency, or lack

thereof, in this industry, is a huge issue as to why costs are increasing. We have talked about the fact that rebates from pharmaceutical manufactures, through the PBM, to the plan sponsor are

not fully disclosed. And as a result, plan sponsors probably aren’t

getting as much as 50 percent of the rebates entitled to them,

which would indeed, lower costs. So that is a large issue. I think

the other large issue——

Mr. CONNOLLY. I am still having trouble hearing you, Ms. Hayes.

Ms. HAYES. I am sorry.

Mr. CONNOLLY. And I know that is an important point that you

are trying to make there. We are not realizing 50 percent of the

savings because of why?

Ms. HAYES. Because rebates between drug pharmaceutical companies, to the PBMs, to the plan sponsors, are not being passed

back 100 percent I would agree that transparency is a large issue.

I would also say that drug pricing and the complexity of drug pricing are large issues. As I said in my opening testimony, a single

drug, a single brand drug, may have over 50 different prices depending on the manufacturer’s strength and package size of that

drug. Generics are even more mysterious, as far as pricing.

The actual PBM itself, so in OPM’s situation, you have 200 different PBM relationships, are setting those prices. So the PBM has

the ultimate control in plan assets by setting the generic pricing

under these Maximum Allowable Costs. And those MAC lists, they

consider proprietary. Not only are plan sponsors never given those

lists, even auditors under non-disclosure and confidentiality agreements, have a hard time getting those to audit against those lists.

62

Those lists change daily. The pricing changes daily. And so it is

very hard to hold anybody accountable for drug pricing. A transparency and lack thereof, I think, is a big issue of why prescription

drugs are increasing in costs.

Mr. CONNOLLY. Right. Mr. McFarland.

Mr. MCFARLAND. Well, I think the best way to describe it is to

let me give you this scenario that I have in front of me. And it is

very simplistic, but it goes to the heart of the problem of where is

the money, and who has it.

The drug manufacturer, the pharmaceutical company, sells a drug to a wholesaler for $1, just using that as an example. This

sets the wholesale price at $1. The wholesaler sells the drug to a

dispenser, either a PBM or a pharmacy, but in this case let us say

it is the PBM for 70 cents, and charges back to the drug manufacturer the pharmaceutical company, 30 cents. So now they are made

whole. The pricing in the PBM contract with the carrier is the

wholesale price, minus the 15 percent discount. FEHBP pays 85

cents for the drug, but the PBM cost was only 70 cents, and apparently it is all legal, but it stinks.

Mr. CONNOLLY. I see my time is up, Mr. Chairman. I thank you.

Mr. LYNCH. Thank you. I have a couple of questions. If we were

to, in fact, classify PBMs and/or pharmacies as subcontractors subject to the Federal acquisition regulations, I am trying to think

that through. Would that, in your opinion, solve the transparency

and cost issue in itself? Or would there be other downstream problems that I need to deal with? I am just trying to think this

through.

Mr. MCFARLAND. It would be very beneficial if that were the

case, that it could become a subcontractor. That would simply be

that the Federal acquisition regulations would impose strict oversight by virtue of being there. But also the Truth in Negotiations

Act, the law which protects the Federal Government and the taxpayer from unscrupulous contractors, that would be in play also. So

that would be very helpful, and no law change would be needed.

This would be something that OPM could do by changing the regulation.

Mr. LYNCH. Very good. Very good. All right.

Mr. MCFARLAND. Excuse me. Can I add something?

Mr. LYNCH. Sure. Absolutely.

Mr. MCFARLAND. What I forgot to mention was that would not

necessarily guarantee a cost type contract. We would have to work

with that aspect of it, but in the Federal acquisition regulations,

it gives you that possibility of approaching that as a means of conducting your business. So that is what would be needed.

Mr. LYNCH. OK. That is very good. That is very helpful. I appreciate that. Let me ask, I guess I was assuming in my mind that

in a simplistic way, that the people who actually are the end-users

of these programs are the ones that are entitled to the rebates.

That was an assumption I made, and I am not sure that is the

case. Does the Federal Employees Health Benefits Plan have a

right to the rebates?

Mr. MCFARLAND. Yes. They do have a right to the rebates, if it

is written into the contract——

Mr. LYNCH. I see.

63

Mr. MCFARLAND [continuing]. Between the PBM and the health

carrier.

Mr. LYNCH. OK.

Mr. MCFARLAND. But even in that situation, the great majority

of rebates, we believe, are maintained by the PBM.

Mr. LYNCH. Please, Ms. Hayes?

Ms. HAYES. If I can add to that, it is like the definition of what

‘‘is’’ is. It is the definition of what a rebate is, and PBMs have been

very careful in saying, OK, you get 100 percent of the rebates, but

then there is other money that they receive from pharmaceutical

manufacturers that aren’t called rebates.

Mr. LYNCH. OK.

Ms. HAYES. They are called cost effectiveness rebates. They are

called formulary rebates. And I think the most egregious is data

selling fees. PBMs sell data to pharmaceutical manufacturers and

get lots of money back for selling data. That money is typically

never passed back to the plan sponsors. Those aren’t considered rebates. So, again, you need to have a broader definition of rebates.

In contracts that we write, we call them financial benefits. All financial benefits that a PBM receives from drug manufacturers

need to be passed back.

Mr. LYNCH. OK. I appreciate that.

Mr. SHEEHAN. If I could?

Mr. LYNCH. Mr. Sheehan.

Mr. SHEEHAN. The one other piece of this to focus on though are

the two kinds of plans. There is the experienced-rated plans where

the money does in theory comes back to the Federal Governments

and the program if it is paid by the PBM. But in community-rated

plans, my understanding is community-rated plans that the rebates

don’t come back. They are negotiated by the plan and that entity

gets to keep the benefit of that population.

Mr. LYNCH. OK.

Mr. Connolly, would you like to get 5 minutes?

Mr. CONNOLLY. I thank the Chair, and I would like to return to

the previous dialog we were having. Is the PBM system more trouble than it is worth? Is the use of PBMs more trouble than it is

worth?

Ms. HAYES. Are you asking me?

Mr. CONNOLLY. I don’t care. Anyone who wants to answer. Who

feels like pulling that mic real close to them and answering my

question?

Ms. HAYES. OK. I feel that PBMs provide a very valuable service.

And they do provide a very valuable service by going out and contracting with 55,000 pharmacies across the United States, by operating mail order pharmacies and providing plans a needed mechanism to process and pay prescription drug claims in a very efficient

manner.

But they have been allowed to run rampant. They have been allowed to take that very good initial idea that was formed back in

the 1970’s and 1980’s, and they have been allowed to kind of run

without control. And I think that is why you get at the issues of

AWP prices going out of control. MAC prices being their own invention for generic drugs. Rebates not being passed back. Auditors

routinely not being able to audit contracts. So initially, they were

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a great idea, and they have just been allowed to kind of run on

their own.

Mr. CONNOLLY. And if I understood your previous answer, Ms.

Hayes, from the previous round of questioning, they are actually

withholding some of the savings from the prescription negotiations,

the negotiated price of prescriptions for Federal employees. Is that

correct?

Ms. HAYES. That is correct.

Mr. CONNOLLY. And then second, they are not only doing that,

they are cloaking themselves in secrecy with non-disclosure agreements?

Ms. HAYES. That is correct.

Mr. CONNOLLY. Even requiring, if I understood you correctly,

Government auditors not being able to sort of penetrate that shield

of secrecy by making them also agree to such non-disclosure agreements. Is that correct?

Ms. HAYES. I am not sure about Government auditors, but I

know private auditors are routinely not allowed to audit these contracts.

Mr. CONNOLLY. And I would just say to the chairman, and I

thank him so much for having this hearing, I think this is a very

significant point. If one of the most important things this Congress

has to do, in the context of Government health care reform, is to

get our arms around the cost of health care. It is one of the fastest

growing costs for the American consumer and family, for small

business, for large businesses, for the Federal Government itself.

Our deficits, our quality of life, our GDP, we are spending 18 percent on health care today of GDP. If we do nothing, by 2025 it is

going to be 34 percent, unsustainable. And yet, we have mechanisms in place that, frankly, significantly impede our ability to get

at those costs, if we can’t penetrate that secrecy shield, and ensure

that we have access to the savings we are effectuating, through the

system that we created a number of years ago. So I really take

your point. It was an efficient mechanism of delivering certain

services, but it has gotten out of control. Mr. McFarland or Mr.

Sheehan, would you care to comment on that?

Mr. SHEEHAN. I think that this is an issue that Pat and I have

worked on for the last 10 years, and we think you are exactly right.

I would agree with Ms. Hayes that the system of processing pharmacy claims is a major advance, and the PBMs have done it very

well for a number of years. And you think about going to a pharmacy and getting your prescription filled and billed within 3 seconds, that is a pretty amazing system.

But the issue is, how much secrecy exists and what kind of disclosure takes place. It is when you got that box in your house and

you are stuck with it, what can you find out about what you are

being charged for, and why it is and how you could do it less expensively.

Mr. CONNOLLY. And before we hear from Mr. McFarland, if I

could followup Mr. Sheehan, is that an area where you believe this

Congress, legislatively, could perhaps help?

Mr. SHEEHAN. Absolutely, because it is regulation of a relationship after the relationship exists.

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Mr. CONNOLLY. Since we are looking at comprehensive health

care reform, what the heck, maybe we could look at this too.

Mr. SHEEHAN. And especially with OPM and a Government program.

Mr. CONNOLLY. Yes. Mr. McFarland.

Mr. MCFARLAND. The PBM concept, I think, is terrific. I think

if done correctly and honestly, it would be a tremendous program.

So it is not going to take a whole lot, other than making everybody

honest. That is a big deal, of course. And we are certainly working

toward that end.

We are in the process in our office of doing a new study, we believe it is going to be new in the Federal sector. We think we will

be able, by virtue of this analytical review, we will be able to come

awfully close to understanding, maybe not the exact cost of the prescription, but we will be able to make comparisons with DOD, Veterans, Public Health Service, Coast Guard. We will be able to find

out what the comparisons are there. So that will be a start for us.

But I am in total concert with both what Ms. Hayes and Mr.

Sheehan have said. And that is that it is very good, but we have

some real groundwork to do.

Mr. CONNOLLY. It is hard for me, the Federal Government, to

know whether I am saving money or not, if I don’t have access to

the information.

Mr. MCFARLAND. Well, that is exactly correct. And just going in

and doing an average audit, by our auditors in our office, is a very

difficult task. But it is almost insurmountable to go in and try and

do an audit of a PBM, insurmountable. I think another example

would be that a health carrier a while back was negotiating a

multi-year contract with one of the PBMs. And part of the deal was

that the PBM would get some additional money if the enrollment

increased.

Well, guess what? The time came, enrollment did not increase,

so what did they do? The health carrier and the PBM sat down and

renegotiated the contract, got the money, turned to OPM, and OPM

paid it.

Mr. CONNOLLY. Mr. Chairman, I just want to end with this. To

hear the Inspector General of the Office of Personnel Management

say, to this committee, that it is almost insurmountable for his

auditors, to be able to access this information in doing an audit of

PBMs, is an astounding statement, and one I would hope this committee and this Congress would find, not a reflection of you, an unacceptable situation that needs to be addressed. I thank the Chair

for his indulgence.

Mr. LYNCH. Thank you, Mr. Connolly. At this point we have covered the landscape, I think. However, beginning with Mr. Sheehan,

I am just going to ask you, is there some area of this that we have

not thoroughly mined? If we haven’t really dug into this, I would

like to give you at least 2 minutes; if you think we have covered

it all, then that is fine, but if you think there is an area where you

could amplify or just single out as being very important to this

process.

Mr. SHEEHAN. OK. Thank you, Mr. Chairman. The focus that I

would leave you with, in addition to the very good points that have

been raised so far, is to be conscious, not just of the price of drugs,

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but what the effects are of the drugs that are given to patients.

And OPM really does not have the ability to do that now, because

these contracts are so broken up into small pieces.

So, it seems to me, one of the issues that OPM should be looking

at is, what is the effect on patients of the drugs that we are buying,

and how can we integrate that with other data that we have. So

what we are doing is being a prudent purchaser across the board.

And when you are talking about close to 30 percent of your total

spend on health care is used on drugs, that really becomes a critical area. Thank you, Mr. Chairman.

Mr. LYNCH. A great point. Thank you, Mr. Sheehan. Ms. Hayes.

Ms. HAYES. Well, if I could summarize some of the things that

we have talked about today. Certainly a single contract for OPM

would benefit rather than this splintering of over 200 different contracts. Simple terms. Simple terms that the lay person can understand, and that the auditor can audit, would be very beneficial.

And not needless complexity. Disclosure of where the money is

going. We have talked about rebates. We have talked about AWP

pricing. The ability to have any auditor that is experienced being

able to audit these contracts, I think is something that is needed.

And I would also say that while it may benefit OPM to get Federal pricing in the Federal Employees program, I worry that may

increase for private industry the cost of prescription drugs.

Mr. LYNCH. When you say Federal pricing are referring to the

Federal supply schedule?

Ms. HAYES. Yes. The Federal supply schedule.

Mr. LYNCH. OK.

Ms. HAYES. The Federal schedule being applicable to OPM. I

hope that does not increase for private industry the cost of prescription drugs. I hope that is not made up. And again, I feel that

would be accomplished if AWP and MAC pricing could be published, so that plan sponsors do have an idea of what pricing is out

there. So, again, that would be my recommendations.

Mr. LYNCH. Thank you. Mr. McFarland.

Mr. MCFARLAND. Well, just to wrap up, I think the important

thing to concentrate on for us, other than getting to the bottom line

price, is realizing sometimes that what we have to do from a criminal investigative prospective and audits, looking at some of the corporations that have gone astray, such as what has happened in the

past with some of the PBMs. When there has to be a caution given

to the corporation that they have to agree to ethical standards, and

that they have to provide their employees with appropriate training, I think that leaves you with a very clear impression of how

easy and how fast a company can go astray. And that is exactly

what happened in a couple of the cases that Jim Sheehan and our

office has worked together.

It is just mind-boggling, the things that have taken place. When

you consider that the PBMs would actually switch drugs, and not

really care about the patient. Or when a patient sends in a prescription and that prescription goes in the waste can, or gets shredded, because they have a certain accountability for how many they

are going to do that day or that week. That kind of stuff is unbelievable, but it is here. It is in front of us. We have to deal with

it. It is just dispensing prescriptions without talking to the doctor

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and getting permission. And the cost to these people. So there is

an awful lot to the overview and the over sight of this concern. And

I know this isn’t that unusual from maybe other corporations, but

it is a big problem. Just the ethics alone.

Mr. CONNOLLY. Thank you, Mr. McFarland. I want to thank you,

and just for the record, I know that we have several hearings going

on right now, plus we have issues on the floor. I am going to allow

any member of the committee to ask you questions in writing. And

I would just ask you to respond to them, as well as inform the committee of your answers.

But with that, I want to thank you for coming before the committee today. I want to thank you for your willingness to help us work

on this problem. It is an ongoing process, so we hope that you will

continue to work with our offices as we try to devise some legislative and regulatory solutions to the problems that we have described here today. Thank you very much. Have a good day.

Mr. SHEEHAN. Thank you, Mr. Chairman.

Ms. HAYES. Thank you.

Mr. LYNCH. Welcome. It is the custom of this committee to swear

all witnesses who are to provide testimony. May I please ask you

to rise and raise your right hands?

[Witnesses sworn.]

Mr. LYNCH. Let the record indicate that all of the witnesses have

answered in the affirmative. I will offer brief introductions of our

next panel and we will have 5 minutes of testimony from each of

the witnesses.

Ms. Nancy Kichak is the Associate Director for the Human Resources Policy Division for the Office of Personnel Management. In

this position, Ms. Kichak leads the design, development and implementation of innovative flexible merit based human resource policies. Previously, Ms. Kichak served as the Director of the Office of

Actuaries at the Office of Personnel Management.

Rear Admiral Thomas McGinnis, currently serves as chief pharmaceutical operations directorate, responsible for pharmacy operations of the TRICARE Management Activity. He is a member of

the Board of Advisory Associates of Rutgers College of Pharmacy.

Navy Mutual Aide Association, nonresident director, and the American Society on Health Systems Pharmacists.

Mr. John Dicken is a Director for Health Care Issues at the U.S.

Government Accountability Office, where he directs GAO’s evaluations of private health insurance, long term care quality, and financing and prescription drug pricing issues. He previously held

Analyst and Assistant Director positions with GAO’s Health Care

Team. Welcome to you all. Ms. Kichak, you now have 5 minutes for

an opening statement.

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STATEMENTS OF NANCY H. KICHAK, ASSOCIATE DIRECTOR

FOR STRATEGIC HUMAN RESOURCES POLICY DIVISION, U.S.

OFFICE OF PERSONNEL MANAGEMENT; REAR ADMIRAL

THOMAS J. McGINNIS, CHIEF, PHARMACEUTICAL OPERATIONS DIRECTORATE, TRICARE MANAGEMENT ACTIVITY,

OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE,

HEALTH AFFAIRS; AND JOHN E. DICKEN, DIRECTOR,

HEALTH CARE, GOVERNMENT ACCOUNTABILITY OFFICE

STATEMENT OF NANCY H. KICHAK

Ms. KICHAK. Thank you, Chairman Lynch. Thank you for holding

the hearing to discuss the oversight of prescription drug benefits

within the Federal Employees Health Benefits Program. The FEHB

law provides OPM with authority to contract with private sector

health plans that cover specified areas of health care, including

prescription drugs. We currently contract with 111 health plans,

which provide 269 plan options nationwide, from which retirees

and employees may select the option that best meets their needs.

The program is a $35 billion program and drugs present about 29

percent of claims.

Like many private sector employers, the FEHB plans use pharmacy benefit management arrangements. To improve the administration of the drug benefits, OPM issued regulations in August

2003, that allowed the OPM Office of Inspector General to have full

access to experience-rated carriers’ agreements with their pharmacy benefit managers. In 2005, OPM issued new contract requirements that included standards for FEHB carriers to use in contracts with vendors for retail and mail order pharmacy.

The carriers required to use these standards, which provide for

PBM transparency, integrity and performance. Each year we negotiate with individual carriers to design a prescription drug package

that provides access to FDA approved drugs placed in tiers, based

on clinical effectiveness and cost. Carriers also use

preauthorization to determine medical necessity for certain drugs,

and drug utilization reviews to check for excessive use, duplication

and frequency. Many carriers promote generic drug awareness and

dispense generic equivalents, if available.

Next I would like to address the specific questions raised in your

invitation to this hearing. You inquired about lack of transparency

in the pricing of prescription drugs. First and foremost to OPM is

providing information so that enrollees understand the benefits

they are purchasing and the options they have. Therefore, many

carriers provide drug transparency tools on their secure member

Web sites. Through our regulations, our Office of the Inspection

General has full access to the agreements our carriers have with

PBMs. Whether increasing transparency alone will lead to lower

pharmacy costs is unclear. In June 2008, the Congressional Budget

Office found that more transparency did not necessarily lead to

lower health care spending.

You asked how prescription drug benefits provided in other Government agencies, such as Defense, VA and HHS. Each of these

Federal agencies operates under its own statutory framework.

TRICARE and VA directly deliver health care as a significant part

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of their service to their constituencies, and have access to drug

prices based on statutory authorities.

You asked how prescription drug benefits are priced and delivered in the private sector. Private sector employers operate in competitive environments, and many directly contract with PBMs to

manage their drug programs and to process and pay prescription

drug claims. PBMs also develop drug formularies, contract with

pharmacies and negotiate discounts and rebates with drug manufacturers. FEHB carriers rely on PBMs to manage drug cost and

utilization for their enrolled population. OPM, in turn, negotiates

with carriers on benefit design and program administration to encourage the efficient use of prescription drugs.

You asked if OPM should consider alternative pricing and contracting methods for the FEHB Program’s drug benefits. The cost

of drugs is of great concern to OPM, as it is to private companies

and other Government purchasers. OPM is committed to studying

all options that may improve the delivery of these benefits. We

want the best and most affordable product and are looking for procedures that could be of assistance.

We are exploring a broad range of options, from improving our

current contractual procedures, to completely redesigning how drug

services can be delivered if our legislative framework is modified.

I appreciate the opportunity to testify today, and I would be happy

to answer any questions.

[The prepared statement of Ms. Kichak follows:]

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Mr. LYNCH. Thank you, Ms. Kichak.

Rear Admiral McGinnis, you are recognized for 5 minutes.

STATEMENT OF REAR ADMIRAL THOMAS J. McGINNIS

Admiral MCGINNIS. Mr. Chairman and distinguished members of

the committee, thank you for the opportunity to discuss the evolution of the Department of Defense TRICARE Pharmacy Program.

Over the last 10 years, DOD has learned many lessons in the

area of pharmacy benefit management. Prior to 2004, DOD’s purchase care pharmacy benefit, that is the retail and mail order portion benefit, was carved into the five regional TRICARE Managed

Care Support Contracts, which provided the TRICARE medical

benefit. DOD determined that this type of carving, decentralized

pharmacy benefit management structure, created significant challenges to the department. And it was clear that DOD needed to

make some major changes for a number of reasons.

First a fragmented market share gave DOD less leverage with

pharmaceutical manufacturers to negotiate favorable pricing, in exchange for formulary placement. Second the pharmacy benefit

lacked portability across the regions, and the lack of standardization led to a non-uniformity of the benefit. And most importantly,

actual expenditures and rebates received by its contractors for

pharmaceuticals, were not transparent to TRICARE. This structure

also led to duplicative administrative services and fees, along with

the inability to effectively plan and develop cost-saving measures.

Moreover, Federal discounts in the retail pharmacy venue were

inaccessible because management of the benefit was not under direct DOD control. DOD, like many large U.S. employers, took action to carve out the pharmacy benefit from the managed care contracts and placed it under DOD management using a single PBM.

DOD now had the leverage it needed for very favorable pricing

with the pharmaceutical industry for formulary management. DOD

has implemented formulary decisions in 38 drug classes since 2005,

representing over 50 percent of the fiscal year 2008 total DOD drug

expenditures. Mr. Dicken, of the GAO, reported last year in April

2008, that DOD avoided over $447 million in drug costs in fiscal

year 2006 due to the formulary process. And $916 million in fiscal

year 2007. TRICARE also received an additional $60 million in rebates from the pharmaceutical industry in fiscal year 2007, making

the savings to the U.S. taxpayer nearly $1 billion.

The fiscal year 2007 drug costs of $6.5 billion, accounted for 18

percent of DOD’s total health care costs. Legislation passed in 2008

authorized DOD access to Federal discounts for all covered drugs

dispensed in its retail pharmacy network, bringing prices in the retail network more in line with what DOD pays for pharmaceuticals

dispensed in its military treatment facilities and in the TRICARE

Mail Order Pharmacy Program, which are some of the lowest

prices available in the country.

Today TRICARE has virtually every community pharmacy in the

country as a member of its retail network, and experiences outstanding customer service based on a DOD quarterly survey of its

beneficiaries.

I want to thank the committee for giving me the opportunity to

speak today about the TRICARE Pharmacy Program, and how we

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continue to provide a world-class pharmacy benefit to active duty

uniform service members, retirees and dependents around the

world.

[The prepared statement of Admiral McGinnis follows:]

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Mr. LYNCH. Thank you, Admiral. Mr. Dicken, you are now recognized for 5 minutes.

STATEMENT OF JOHN E. DICKEN

Mr. DICKEN. Great. Thank you, Mr. Chairman and members of

the subcommittee. I am pleased to be here today as you examine

approaches to control rising drug spending within the Federal Employees Health Benefits Program [FEHBP].

Prescription drug spending has been one of the fastest growing

segments of health care spending in both the public and private

sectors. Notably, prescription drug spending has been a significant

contributor to FEHBP costs and premium growth. Projected increases in the cost of prescription drugs alone, would account for

about a 3 to 5 percent annual increase in FEHBP premiums from

2002 to 2007.

The Office of Personnel Management predicts that prescription

drugs will continue to be a primary driver of program costs. Other

Federal programs also continue to face unsustainable increases in

prescription drug spending, and use varying approaches in an effort to control the spending.

My remarks today, based on prior GAO work, and updates from

other congressional and Federal sources, will describe the approach

used by FEHBP to control prescription drug spending. I will also

broadly summarize approaches used under Medicare, the Department of Veterans Affairs, the Department of Defense and Medicaid.

As you have already heard today from other expert witnesses,

representing several of these Federal programs, my comments will

step back to describe at a higher level, the general approaches

these programs use in controlling drug spending. In short, the primary difference among these programs, is that FEHBP and Medicare Part D, rely on competition between health plans to control

prescription drug spending, while VA, DOD and Medicaid use other

methods, such as statutorily mandated prices for drug negotiations

with drug suppliers.

For FEHBP, competition aims to give plans an incentive to reign

in prescription drug costs, and to leverage their market share to

obtain favorable prices. Like most private employer-sponsored

health plans, most FEHBP plans contract with PBMs to help administer the prescription drug benefit.

We have outlined key approaches that PBMs use in an effort to

achieve savings for the health plans. These include: One, negotiating rebates with drug manufacturers and passing some of the savings to the plans; two, obtaining discounts from retail pharmacies,

and dispensing drugs at lower costs through their own mail order

pharmacies; three, using such techniques as prior authorization

and generic substitution to reduce utilization of certain drugs, or

substitute other less costly drugs; and four, developing and managing formularies to encourage enrollees to use preferred drugs and

to influence price negotiations with manufacturers.

While OPM itself does not negotiate drug prices or discounts for

FEHBP, it attempts to limit spending through annual premium

and benefit negotiations with plans, including the encouragement

of spending controls, such as benefit designs that provide incentives for increased use of generic drugs.

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Medicare Part D uses a model similar to the FEHBP, by relying

on competing health plans and their PBMs to control drug spending. In part, plan sponsors compete on their ability to negotiate

prices and price concessions with drug manufacturers and with

pharmacies. Even though the Centers for Medicare and Medicaid

Services is not involved in negotiations, plans are required to report price concessions to CMS, to help determine the extent to

which they are passed on to beneficiaries.

In contrast, VA and DOD use statutorily mandated discounts as

well as direct negotiations with drug suppliers, to limit drug spending. They have access to a number of prices to consider when purchasing drugs, paying the lowest. These include the Federal supply

schedule prices that VA negotiates with drug manufacturers. These

prices are intended to be no more than those manufacturers charge

their most-favored, non-Federal customers under comparable terms

and conditions.

Finally, Medicaid is subject to aggregate payment limits and

drug payment guidelines set by CMS. Medicaid does not negotiate

drug prices with manufacturers, but reimburses retail pharmacies

for drugs dispensed to beneficiaries at set prices. An important element of controlling Medicaid drug spending is the Medicaid drug

rebate program, under which drug manufacturers are required by

law, to provide rebates for certain drugs covered by Medicaid.

Under the rebate program, States take advantage of prices manufacturers receive for drugs in the commercial market, that reflect

discounts and rebates negotiated by private payers.

In addition, Medicaid, like each of the other programs I discussed, uses techniques such as prior authorization, generic substitution, utilization review, and cost sharing requirements to limit

drug spending. Mr. Chairman, this concludes my statement. I will

be happy to answer any questions that you, or other members of

the subcommittee, may have.

[The prepared statement of Mr. Dicken follows:]

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Mr. LYNCH. Thank you, Mr. Dicken.

I now recognize myself for 5 minutes. Ms. Kichak, in your testimony, admittedly you said that transparency doesn’t always result

in lower prices; however, for the oversight committee, for us, it is

not an option. Oversight cannot go forward without transparency,

so we don’t have a choice of not having transparency, even if we

didn’t think the value of transparency was something that we put

a high value on, let us say. It has just got to happen. We have to

have it statutorily——

Ms. KICHAK. Right.

Mr. LYNCH [continuing]. And through our congressional mandate,

it is to have transparency.

Ms. KICHAK. Well, we support transparency, which is why with

every suggestion or every time our Inspector General makes suggestions to us, we consider them very carefully. And we have done

two significant things, which I had in my opening statement, that

we got from work when the Inspector General came back to us and

raised problems.

One was what we call the large provider contract regulations,

which gives the Inspector General full access to the full PBM contract. I understand that it is now not digging down as far as they

would like to go. What was described in the previous panel, is an

industry problem, where the PBMs are not making their costs and

their operations public to anyone. It is not just an FEHB problem,

but within the FEHB, we have given full access to the contracts

that are available to our Inspector General.

Mr. LYNCH. Understood.

Ms. KICHAK. Yes.

Mr. LYNCH. Understood, but the pharmacy benefit managers

have made this system so opaque and so complex, that even when

I sit an auditor right on there, have them go, these are professionals now——

Ms. KICHAK. Right.

Mr. LYNCH [continuing]. They can’t figure out what things cost

and whether I am getting a good deal or not.

Ms. KICHAK. And we would agree with you.

Mr. LYNCH. Right. OK. So that is a problem. That is a huge problem. We can’t operate that way anymore. The administration is

looking for savings, and we are trying to help the administration,

and we think this is an area that is very fertile ground for savings.

When we compare what TRICARE is paying, what others are

paying, and we look at the discount TRICARE, up around 50 percent, VA up around 60, somewhere in that range, and then we look

at OPM getting about 12 percent with the FEHBP, Federal Employees Health Benefits Plan, that simply is not acceptable.

Now we need to dramatically change this. Part of one solution

would be to classify PBMs as subcontractors, subject to the Federal

acquisition regulations. Now that is not a simple system either, as

someone who has spent far too many trips to Iraq and Afghanistan

trying to figure out how we manage those contracts.

Those are not simple either, but they are a walk in the park compared to trying to figure the system that we have now with the

Federal Employees Health Benefits Plan. It is actually structured

and operated in a way that is meant to block oversight and block

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auditing. We cannot have that any more. There are even procedural limitations on the auditors; they are not allowed to copy information, that whole system is built on—there is no competitive

model, in your competitive model.

The system that is set up at the Federal Employees Health Benefits Plan is basically increase complexity, to the degree that it is

not understandable, hide information from the consumer and from

the auditors, and from the U.S. Congress Committee on Oversight.

Basically deny information that would allow people to make that

competitive decision on pricing, and basically charge as much as

you possibly can in that atmosphere and in that framework of concealing information and making it so complex. That is the system

we have right now. And we can’t continue to operate that way.

So what we think is one way to clarify is to classify these folks

as contractors. At least we put them in a system where we can

keep score and we can figure out whether they are giving us a raw

deal or not. And as I understand it, we can do that by Executive

order, we can do that by regulation right now at OPM. Is that

something that you are open to?

Ms. KICHAK. We believe that there is definitely more information

that should be available, but we do not believe that we have the

regulatory authority to do that. We think that what we have done

through regulation—you see, OPM contracts with the health plans.

The health plans contract with the PBMs. We are not direct contractors for the drug services, so we don’t have the same authority

we would if we were a direct contractor.

In order to become a direct contractor with a PBM, it would require a statute change, in our opinion, not a regulation change. We

believe, but we will continue to explore it, because we explore everything our Inspector General suggests to us, but we believe the

regulation we changed giving the Inspector General full access to

PBM contracts, was the extent of the authority that we could do

through regulation.

So this is a question of law that needs further exploration, because we certainly believe in transparency and we would like to

further that to the extent that we can.

Mr. LYNCH. Well, I have to say that in trying to figure this whole

system out, there is nothing more complex than what you have

over there at the Federal Employees Health Benefits Program. This

is really very convoluted, and I am an attorney. I have done contract law.

But you have a system over there that is meant to deceive, and

to keep the truth and information from getting to the public and

to the beneficiaries. We don’t even know what stuff costs, and so

you may say you are for transparency, but take a good hard look

at that system, and that doesn’t even have the beginnings of any

transparency and we are supposed to be trying to save money here.

And I am very disappointed to hear you say that, because we

think you do have the regulatory power. I will file legislation to

have these folks classified as subcontractors. I am going to do that.

I think you are making me work harder than I need to. I think you

have that power already, but maybe my filing this legislation will

light a fire under somebody.

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Ms. KICHAK. Well, we would be glad to get back to you with an

explanation of what we think our authority is. Because if we have

that authority, then we will not make you work harder than you

have to. We will see what we can do to exercise that.

Mr. LYNCH. God bless you.

Ms. KICHAK. OK.

Mr. LYNCH. Thank you. All right. Now, look, you are new over

there, you have to be new.

Ms. KICHAK. Thank you.

Mr. LYNCH. No, but this is probably a question beyond your own

experience, but do you have any idea why we might have 256 contractors that we deal with?

Ms. KICHAK. Because we have HMOs in most of the States in the

Nation. We only have about 13 Government-wide plans that service

everybody. And even out of those 13, a certain segment of them,

a very important segment of them, are to just limited groups of

people like foreign service officers, or rural letter carriers. But we

have HMOs in California, in Florida, New York, etc.

Mr. LYNCH. I see.

Ms. KICHAK. And they deliver care locally.

Mr. LYNCH. And there are only a handful of the larger ones that

are national? Most of these are regional or local?

Ms. KICHAK. Most of them are regional.

Mr. LYNCH. OK.

Ms. KICHAK. Most of the big numbers come from the regional

plans.

Mr. LYNCH. OK.

Ms. KICHAK. And again, the national plan is open to everybody.

I think it might be about seven and then another five are to special

groups.

Mr. LYNCH. OK. Now you have 7.7 million, that I gather, that

are within your group there?

Ms. KICHAK. Right.

Mr. LYNCH. Let me turn to Rear Admiral McGinnis now. I think

you have 9 million, but you have 7 million that are actually participants in your pharmacy plan, and those folks are spread out all

over as well, aren’t they?

Admiral MCGINNIS. That is correct, sir. They are all over the

world. We have about 9.5 million beneficiaries today, and about 7

million use the pharmacy benefit.

Mr. LYNCH. Now in your testimony, you also described that you

have a limited number of contractors. Is that correct, or did I mishear you?

Admiral MCGINNIS. No. You are correct. We have one contractor

currently, that provides the retail pharmacy benefit for us. One

contractor that provides the mail order pharmacy benefit for us. It

happens to be the same contractor, ExpressScripts. We saw duplications yet in that, and beginning November 4th, there will only

be one contractor providing both the retail and pharmacy benefit.

Mr. LYNCH. How did you do the competition for that one contract?

Admiral MCGINNIS. We used the Federal Acquisition Regulations, sir. We put out our requirements, requests for proposals.

They are submitted, we review them internally, and award that

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contract on many different aspects. Past performance, we go out to

commercial clients who use this PBM and ask them, how are they

doing for you?

Mr. LYNCH. Right.

Admiral MCGINNIS. And we take that into consideration when

we award this contract. It is a 1-year contract with four option

years.

Mr. LYNCH. It is interesting. You have a situation where you are

using one contractor. You are I think, perhaps putting all your

chips on one bet, but you are getting a 50 percent discount or something of that magnitude. And when we dice it up, we are getting

a 12 percent discount. I am just wondering if there is a proximate

cause there, a direct relationship on that point.

Mr. Dicken, you addressed that a little bit in your opening statement, about the fact that there are two models here. Maybe it is

apples and oranges I am comparing here, but what do you think?

Mr. DICKEN. Well, I think certainly the differences there are in

part because some of the prices that TRICARE are able to get, are

statutorily set. That they are able to choose the lowest of prices.

They are defined by statute, that set ceiling prices.

Those ceiling prices in exchange are based on some of the best

prices that are able to be negotiated by non-Federal payers. And

so there is a certain guarantee of a level of prices that then

TRICARE can negotiate below if they are able to. On the other

hand, FEHBP, in its contracts with the multiple plans, those are

individual contractual relationships where the plans and their

PBMs will negotiate on behalf of each plan. And there is no guarantee in the way that there would be for TRICARE of a ceiling

price.

Mr. LYNCH. OK. I understand, Ms. Kichak, that OPM attempted

to control drug spending in 2000 by introducing a pilot plan with

SAMBA?

Ms. KICHAK. Correct.

Mr. LYNCH. Do you recall that?

Ms. KICHAK. Yes, I do.

Mr. LYNCH. Now I have been reading up on this so I might be

wrong on this, but as I understand it, SAMBA is the Special

Agents Mutual Benefit Association.

Ms. KICHAK. Correct. Mostly FBI agents and Secret Services

agents.

Mr. LYNCH. Just a few thousand people at the time?

Ms. KICHAK. Yes.

Mr. LYNCH. OK. And my understanding is that you tried to do

a pilot program that would allow the special agents and their families, just a few thousand beneficiaries, to purchase their drugs off

of the Federal supply schedule.

Ms. KICHAK. That is correct.

Mr. LYNCH. OK. And if again, I am correct, at the threat of that

pilot program, we had three drug companies, big ones, refuse to

participate and supply drugs to that program.

Ms. KICHAK. I can’t attest to the exact number, but that is what

happened. It was a concern of the drug industry. We were trying

to try a new approach and get better discounts. It was a concern

of the drug industry, that if that was the nose under the tent, and

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we were going to move 8 million people, onto those Federal supply

schedules, with those major discounts, the pharmaceutical companies would not be able to sustain the discounts they had promised

to a big group, but more limited than ours. And they opposed it,

and said that they would not honor their contract on the Federal

supply schedule if we went forward. And we were forced to withdraw that proposal.

Mr. LYNCH. Wow. The formulary that would have been available

to the special agents, was that a full formulary of proprietary drugs

as well as generics?

Ms. KICHAK. That was the full spectrum of drugs on the supply

schedule. Yes.

Mr. LYNCH. I am just wondering why we didn’t call their bluff,

in terms of their refusal to supply those drugs. It seems like sort

of a brash and confrontational way to deal with the problem.

Ms. KICHAK. It was definitely a very stressful situation, because,

of course, our responsibility is to make sure, and we take this very

seriously, that Federal employees have access to health care. And

every year they have the option to select new. But we wanted to

have that plan in place and coverage continuing, and the manager

of the Federal supply schedule at that time, VA, was very concerned that this pilot was jeopardizing care to other members of

the VA, or other Federal purchasers from that schedule, and really

asked us to withdraw the pilot.

I think that we pushed it very, very hard. It delayed our getting

ready for open season and negotiating rates and benefits, because

we had to get somebody else. We had open season on time, but we,

at some point, had a point at which we had to enter into a contract

with SAMBA to go forward with these coverages or they would not

have been in the program in the following year. And so we chose

to withdraw the pilot.

Mr. LYNCH. OK. Now, and I understand you don’t remember how

many companies were involved?

Ms. KICHAK. I really don’t.

Mr. LYNCH. From my readings, it was three larger pharmaceutical companies. Now I am just wondering if you remember

what percentage of the drugs on the formulary would have been affected by these three companies, or four companies, however, in

terms of the program going forward?

Ms. KICHAK. Ninety percent.

Mr. LYNCH. Ninety percent?

Ms. KICHAK. So they were three large companies.

Mr. LYNCH. OK. Yes.

Ms. KICHAK. That I have confirmed.

Mr. LYNCH. I am just trying to replay that in my mind. I know

it was Pfizer, Parke-Davis and Merck. That is the information that

I have. I am just wondering if a similar pilot program would work

if we just used generics. That way, if something is generic, it is out

there, it is not subject to patent control, and if you have real competition, and you get a lot of people that could produce that drug

at a reasonable cost, do you think a pilot program just focusing on

generics, where three big players can’t come in and say embargo

this whole deal.

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Ms. KICHAK. Well, let me say, as we have said before, this is a

very complex program, and drugs are very complex, retail, mail

order, generic, etc.

Mr. LYNCH. Tell me about it.

Ms. KICHAK. And so I am uncomfortable, but I am going to take

a stab at it anyway.

Mr. LYNCH. OK.

Ms. KICHAK. Where you really need to save your money in drugs

is on the non-generic. The generic are really, in my opinion and in

my experience, are pretty low priced anyway.

Mr. LYNCH. All right.

Ms. KICHAK. And to make it worthwhile, I think you would have

to go for the brands.

Mr. LYNCH. That is a great point. That is a great point. Thank

you. Admiral McGinnis, the success that you have had over there,

at TRICARE, has there been any attempt to expand beyond your

existing population?

Admiral MCGINNIS. No. We have only covered members of the

seven uniform services, so we have not been asked to look any further than that. We have expanded the benefit to virtually every

pharmacy in the country today.

Mr. LYNCH. OK. In the testimony earlier today, Ms. Kichak, we

heard from Mr. McFarland that the transparency and the data for

them to make determination, was not available, and yet you say

there has been a new effort to do just that, to free that up. There

seems to be a little bit of difference in your views and Mr.

McFarland’s views, the Inspector General, in terms of the access to

the information, the transparency of the organizations themselves.

Do you know what might cause that difference of opinion?

Ms. KICHAK. I think what is happening here is, at one point

when one of our plans subcontracted with a PBM, the subcontract

was not available for audit. So now that actual subcontract is available, there is definitely improvement. What I believe that our Office of Inspector General would like and find very helpful, and what

all of the previous panels asked for, was more basic. How much

profit, where is the money going, the whole under workings within

the drug companies.

That doesn’t become a part of the contract, or the subcontract,

and that is not yet available. And as I was saying before, I am not

sure, and I promise to get you an answer, that we have the authority, through our regulatory process, to demand that kind of information. But I will find out. At one point, the contract wasn’t even

available. Now the contract is fully available, but the underlying

workings still have not been opened up. In the same manner, that

all the previous witnesses said, the drug companies do not make

this information available.

Mr. LYNCH. OK. Let me jump back. My idea originally was to

look at the generics, because I saw that problem you had with the

SAMBA Program. Is there any appetite—I know the earlier incident was in 2000, is there any appetite at OPM to look at another

pilot program where we might expand the access to the Federal

supply schedule for others?

Ms. KICHAK. Well, as you know, at OPM we have a new director,

who is taking a top-down look at everything. We have a new focus

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on data driven analysis, which is also looking at that stuff, and we

are looking at every health plan with a fresh look. Now the new

administration, by the time they got here, we were already engaged

in negotiations for 2010, because the process starts early. But that

is certainly something—we have an appetite right now for looking

at everything. We are bottom-up delving into whether these schedules are the right way to go, whether we should carve out drugs.

Everything is on the table, how much data we can get from our carriers is also on the table. So we are taking a fresh look, and I

would say, therefore, we are definitely going to consider that along

with many other options.

Mr. LYNCH. OK. You know one of the other things, when I read

through that case of the SAMBA plan, it puzzled me. Now under

the statutory and regulatory guidance, these carriers should not be

receiving any financial benefit from the carved out pharmacy plans.

That is the way it is supposed to work. Now why do you think we

have such opposition from the carriers when we try to introduce—

if there is no financial benefit, why all the opposition?

Ms. KICHAK. Well, change is difficult for everybody, first of all.

Second, administratively, particularly in this day and age where we

are trying to do so many health care programs, wellness programs,

that is the wrong word, but case management programs. For example, diabetes, where you are trying to track prescription drugs, the

usage of the right drugs, what are health care outcomes, and we

are pushing our plans to do things like that, I think that is an incentive, or one of the reasons why the plans want to be able to

have access to that data. I think the other thing they are trying

to do is, in the competitive environment, they think they can come

up with the best design. And we do have different designs.

We have people today that are waiving the copays on generic

drugs to try to get people to switch. We have other people, other

plans that get you in generic drugs by a plan manager who looks

at that. We have plans that are trying to be more cost-effective

through e-prescribing and getting you to generic that way. Or trying to get you to the most effective drug that way. So I think the

plans are trying to use the drugs as part of their health care initiatives, and that is one of the reasons for the resistance.

Mr. LYNCH. Fair enough.

Mr. Dicken, I have not bothered you that much. Let me shift to

you. Has GAO encountered any difficulty, in other instances, obtaining access to data as we had described with Ms. Kichak in trying to fulfill its role in assuring that the Federal Government does

not overpay for prescription drugs?

Mr. DICKEN. Yes. I would be glad to describe GAO’s experience.

I think the panelists in the first panel, well-described the challenges that oversight agencies have in transparency in this area.

GAO in 2003, did examine the experience of three FEHBP plans

with their PMBs, and we were able to look at particular contracts,

or financial reports that were specific to those FEHBP plans and

their PBMs.

I would like to make a distinction though, that while we were

able to look at that, I think that was much of the issue that Ms.

Kichak was talking about for what is being made available to the

Inspectors General. There is a much larger book of business that

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the PBMs have where FEHBP is a significant part, but not the entire part. And that affects their contracts more broadly with manufacturers and with pharmacies. And so while we were able to look

at the information specific to FEHBP, we did not obtain information for that broader book of business that could affect things like

the prices they are requiring for mail order drugs, or the total rebates that they are getting on their entire book of business, not

just those allocated to FEHBP.

Mr. LYNCH. Let me drill down a little bit on that. You had a

chance to review the pharmacy benefit managers. In your analysis,

or attempted analysis, what information was there that you did not

have access to that you think might have been helpful in judging

their effectiveness?

Mr. DICKEN. I think the distinction really is, we were able to look

at what was specific to the FEHBP book of business, but not information that was broader across their entire book of business that

would then affect rebates they may be getting that would include,

for example, their FEHBP lives, as well as all of their commercial

lives that PBM would be negotiating with manufacturers on their

behalf.

Mr. LYNCH. So that was considered proprietary, the relationships

they had with, in other words, these rebates that are—call them

what you may, these other financial incentives that they were getting, those arrangements were not subject to your review.

Mr. DICKEN. If they were not rebates specifically dedicated to

FEHBPs, so we were able to look at what rebates the PBMs promised to pass on to the FEHBP plans, but that they may also be getting rebates that are much broader for their entire book of business. And that is the part that we did not obtain.

Mr. LYNCH. OK. But FEHBP, you have 7.7 million people?

Mr. DICKEN. Yes.

Mr. LYNCH. Well, I guess you can’t assume that any percent of

the volume of their business is dedicated. But it would be nice to

get that information to find out their full menu of revenue sources,

and find out whether or not the employees, the members of the

FEHBP are getting the benefit of some of those rebates.

As I did earlier with the previous panel, I am going to ask you,

you know obviously I didn’t exhaust the entire landscape of issues

that we could have addressed. But, and again, I am going to allow

other Members who are not in attendance to ask you questions in

writing, and I would appreciate your cooperation in answering

those if they do come. Why don’t we start with Mr. Dicken, since

we have been down at Ms. Kichak’s end, for most of the hearing?

Take 2 minutes, if there are issues that we did hit on here, that

you think are important, we would like to hear about them.

Mr. DICKEN. Well, I think the hearing has well-addressed some

of the challenges that oversight faces within the context of FEHBP

and the plan’s contracts with PBMs. I guess I would just note that

this is not an issue that is unique to FEHBP. I can speak to GAO’s

experience also.

For example, with Medicare Part D. That is an area where we

have been working since 2007. In that case, plans are required to

report price concessions or rebates they may get to CMS; however,

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care Part D as not allowing to disclose that to GAO. GAO has been

working with committees, including this committee, for legislative

clarification that GAO indeed, would have access to that information for Medicare Part D, in fact.

Mr. LYNCH. You said a legislative fix? Or is that a regulatory fix?

Mr. DICKEN. It is a legislative, well because there is a—HHS has

interpreted the legislation. We are seeking legislative clarification

that GAO does have access, under its broad authority.

Mr. LYNCH. Is there a bill out there right now that gives you that

access?

Mr. DICKEN. There is a bill, HR2646.

Mr. LYNCH. Who is sponsoring that?

Mr. DICKEN. Pardon me?

Mr. LYNCH. Who is the sponsor?

Mr. DICKEN. I can get back to you on that.

Mr. LYNCH. OK. We will figure it out. I thought you might know.

OK. Thank you. I didn’t mean to interrupt, but please go ahead.

Mr. DICKEN. I think that is what I wanted to highlight. Thank

you.

Mr. LYNCH. OK. Thank you. That was helpful.

Rear Admiral McGinnis.

Admiral MCGINNIS. Mr. Chairman, I think that transparency is

probably the most important thing on both sides. Our PBM must

pass through all rebates benefits. They are not able to even negotiate rebates. Everything is a pass through to the Government. We

negotiate the rebates with the pharmaceutical company. Everything on our side also has to be transparent. We put our formulary

on the open Web, everybody can see our formulary. Our formulary

committee minutes are put up on the Web. We have a beneficiary

advisory panel, advising us on that formulary. Bringing things to

our attention to consider, before we make changes to that formulary.

We have good feedback from that beneficiary organization. We

incentivise our PBMs properly so that they come back consistently

with a 95 percent or better beneficiary satisfaction rating to get the

monetary incentives that we put in our contract. And we feel that

these types of things work very well for us. The formulary placement of medications has brought us great results with the pharmaceutical industry. They have been willing to give us much better

pricing than the Federal ceiling price for that formulary placement.

Mr. LYNCH. Very good. Thank you, Admiral. And thank you for

your service to our country.

Ms. Kichak, 2 minutes.

Ms. KICHAK. We are very concerned about drug costs, because

they are 30 percent of our program, and we want to know everything we can about drug costs so that we can find the best way to

deliver them and the most cost-efficient way to serve the Federal

employees and retirees. We are working with our Federal partners.

We are working with TRICARE to understand their system.

We are exploring all options, including options we have tried before and didn’t fail. And we are responding as quickly as we can

to suggestions to make more information available to our Inspector

Generals. So we are going to keep working on this problem until

we make it better in some fashion or another.

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Mr. LYNCH. Thank you, Ms. Kichak. I want to thank you all for

your willingness to come before the committee and help us with our

work. And you can tell Director Berry that we appreciate the participation and cooperation of OPM as well. Thank you all, and have

a good day.

Ms. KICHAK. Thank you.

Mr. LYNCH. Thank you for your patience. I know it has been a

long day. It is the custom of this committee, that all witnesses to

testify are to be sworn. Could I ask you to please rise and raise

your right hands?

[Witnesses sworn.]

Mr. LYNCH. Let the record indicate that all the witnesses have

answered in the affirmative. I am going to offer brief introductions

of each of the witnesses, and then you will be allowed 5 minutes

for an opening statement.

Dr. Jack Needleman is currently an associate professor in the

Department of Health Services of the UCLA School of Public

Health. In 2007 he was inducted as an honorary fellow of the

American Nursing Academy. Before beginning his tenure at UCLA,

Dr. Needleman was a member of the faculty of the Havard School

of Public Health.

Dr. Ralph de la Torre is a nationally renowned cardiac surgeon

and an innovative health care businessman. Dr. Ralph de la Torre

became the president and CEO of Caritas Christi Health Care,

three facilities in my district, a matter of disclosure. In April 2008,

with 12,000 employees, Caritas Christi is the 11th largest employer

in Massachusetts. As CEO, Dr. de la Torre’s mission is to revolutionize the delivery of health care in the region by moving integrated clinical services out into the communities where patients

live. In addition to his clinical endeavors, Dr. de la Torre has

served as a health care consultant.

Mr. Mark Merritt is the president and CEO of the Pharmaceutical Care Management Association. The National Association

Representing America’s Pharmacy Benefit Managers, lower prescription drug costs for more than 200 million Americans, and

managed about 70 percent of the more than 3 billion prescriptions

dispensed in the United States each year. Mr. Merritt has served

as a senior strategist with America’s health insurance plans and

the pharmaceutical research and manufacturers of America.

Welcome, gentlemen. Dr. Needleman, you now have 5 minutes

for an opening statement.

STATEMENTS OF DR. JACK NEEDLEMAN, ASSOCIATE PROFESSOR IN THE DEPARTMENT OF HEALTH SERVICES OF THE

UCLA SCHOOL OF PUBLIC HEALTH; DR. RALPH DE LA

TORRE, PRESIDENT AND CEO, CARITAS CHRISTI HEALTH

CARE; AND MARK MERRITT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION

STATEMENT OF DR. JACK NEEDLEMAN

Dr. NEEDLEMAN. Chairman Lynch, members of the subcommittee, thank you for inviting me to testify. Let me add just one item

to the biography that you provided, which is, prior to going to HarVerDate 11-MAY-2000 12:24 Aug 26, 2009 Jkt 000000 PO 00000 Frm 00116 Fmt 6633 Sfmt 6633 U:\DOCS\51394.TXT KATIE PsN: KATIE
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vard, I was vice president/co-director of the Public Policy Practice

at Lewin-ICF, now the Lewin Group, a thing that has some meaning in these halls. You have my written testimony, so I simply

want to highlight a few key points from it, some of which have

been made today, but perhaps deserve one more hammer hitting

the nail.

The first point is simply that the Federal Employees Health Benefits Plans, by and large, are using the current standard practice

of contracting with PBMs for their drug benefits. And measured

against a standard of what you would pay if you were strictly retail, there is substantial savings.

The industry-sponsored study published in 2008, or put out in

2008, that estimated that about 28 percent discount from retail,

which I would say given its industry sponsor, should be treated as

an upper bound. You know, that is a considerable savings, but it

is not appropriate to be measuring the benefits of the PBMs structure in FEHBP, against retail. That is the wrong standard.

We have seen some discussion today about other more appropriate standards, and I think it is very clear, that compared to

other large Federal purchasers, there is considerable evidence to

date that the FEHBP plans are getting smaller discounts than

other Federal purchasers. We can’t tell how substantial those discounts are, or what PBMs are being paid for their services because

of a lack of transparency in PBM billing plans.

To put it very simply, the PBMs buy on one schedule, they bill

to the Federal Government and other health plans, on a different

schedule. As has been discussed by prior participants, prior panel

members, for generic drugs, the purchasing is built on an MAC, a

Maximum Allowable Cost schedule, which will vary from PBM to

PBM, and may vary from where they are getting the drugs across

the plans, plus administrative fees. For unpatented, branded, solesource drugs, they are paying a negotiated price. And that negotiated price has a whole variety of discounts and rebates that are

potentially associated with them.

The size of those discounts are a function of the bargaining

power of the PBM. And in part, that includes the threat of whether

or not to include the drug in the formulary or how well tiered it

will be within the formulary of a plan. That is where the bargaining power to negotiate the discount comes from.

The historic practice of the PBMs for actually billing the folks

who have contracted with them to conduct these services, is either

an aggregate amount or a percentage of wholesale, or some other

measure, which may or may not make clear, typically doesn’t make

clear what was paid as costs for the drugs themselves, and what

is being charged for administrative services.

That lack of transparency has been heavily criticized by purchasers and consumer groups, and there have been some efforts to

address it. The Human Resources Policy Association, the group of

human resource managers for large businesses, have developed

standards for transparency in pharmaceutical purchasing, which

include charging the acquisition costs, both at retail and mail order

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ing, and the right to audit, that those practices have been fully implemented.

These represent minimum standards, and many of the largest

PBMs, including the key PBMs in the FEHBP Program, have actually signed on to that. However, the PBMs offer the plans the option of traditional pricing, or transparent pricing. And the pricing

they have offered under transparent pricing, according to Ms.

Hayes, who was here earlier, has been substantially higher.

Clearly, as many industry observers have noted, there should be

some skepticism about the industry’s willingness to meet the commitment it has formally signed on to for transparency. If you ask

for my recommendations on directions to go in, I would say that at

a bare minimum, the FEHBP Plans should demand and enforce

contract billing provisions for costs, separated from the administrative charges and profits that are being made. So, separate billing

provides for a clear accounting of the costs of the drugs, the administrative costs and fees being paid to pharmacies and other third

parties, and the administrative profits and fees associated with the

PBMs services.

The FEHBP Plans, either collectively or individually, need to negotiate hard for appropriate administrative fees, and consider either make versus buy decisions, or going to a single vendor as

TRICARE has in order to get a good deal for the Federal Government. They should also consider whether to use scheduled Federal

prices, or negotiated prices, for FEHBP in lieu of going with the

PBM negotiated prices.

It is clear that PBMs provide a variety of services beyond negotiated prices, enrollment and eligibility determinations, claims paying, checks for drug/drug interactions, patient education, facilitating therapeutic interchange and appropriate use of generics. With

more transparent pricing we would be in a far better position to

access the cost and value of these services, rather than simply including them as the full package at a price that is not clear.

Thank you for the opportunity to testify, and I would be happy

to answer any questions.

[The prepared statement of Dr. Needleham follows:]

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Mr. LYNCH. Thank you, Doctor.

Dr. de la Torre, you are recognized for 5 minutes.

STATEMENT OF DR. RALPH DE LA TORRE

Dr. DE LA TORRE. Thank you.

Mr. Chairman, I want to thank you for inviting me to participate

in this hearing. The rising cost of health care, as we all know, is

dealing a crippling blow to employers across the United States. Escalating premiums suffocate not only the employees but employers

who struggle to provide a benefit to their employees. At the forefront of this escalation is the cost of prescription drugs. Controlling

prescription drug costs is essential to containing health care costs.

Unlike many other contributors to the cost of health care, prescription drugs serve not only in the treatment of illness but as a

preventive measure. This is especially true in the treatment of

chronic illness. Many recent reports document how escalating copays on pharmaceuticals lead to noncompliance on behalf of patients. This non-utilization can lead to the escalation of chronic illness, and the subsequent grave implications to patient and employer. As a specific example, patients who fail to comply with

medications that control blood sugar or hypertension, are more

likely to develop atherosclerosis which can lead to heart attack and

stroke. For all these reasons, to describe but a few, it is imperative

that an employer, through the benefits offered its employees, control prescription drug costs.

Within the context of my comments, the Federal Government is

the largest employer in the United States of America. Like all large

employers the Federal Government should capitalize on its purchasing power to lower its cost of goods and services. In fact, this

concept is at the very essence of our capitalist economy. Health

care should be no different. When the largest employer in the

United States addresses the cost of providing prescription drugs to

its employees, the first step seems obvious. The Federal Government should use its purchasing power to secure preferential pricing

for its insurance plans and for its employees.

The next question is how? What method? What means does the

Federal Government have to secure such pricing, without a timeconsuming overhaul in health care delivery? In review of our current practice, I will propose one, but obviously not the only solution

to stimulate some discussion.

In 1991 section 340B of the Public Health Service Act was enacted. This act requires drug manufacturers to provide outpatient

drugs to certain covered entities at a reduced price. This process

was further simplified through the creation of a prime vendor. This

process routinely yields pharmacy savings of 25 to 50 percent for

the covered entities, beyond that of PBMs or GPOs. Rather than

create a second parallel process for group purchasing, we should

look to expand participation in this program to benefit some or all

Federal employees and the U.S. Government.

One relatively simple solution would be to modify section 340B

of the Public Health Service Act, and the subsequent Pharmacy Affairs Branch definition of what constitutes a patient, at a disproportionate share hospital, to simply include Federal employees

within a geographical region. A qualifying entity could then estabVerDate 11-MAY-2000 12:24 Aug 26, 2009 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 U:\DOCS\51394.TXT KATIE PsN: KATIE
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lish an outpatient pharmacy, complete with mail order and internet

capabilities, to provide prescription drugs at markedly discounted

prices.

In fact, many 340B hospitals already do this same thing. Since

these entities are not allowed to resell or markup 340B prices, a

minimal processing and handling fee would be the only incremental

cost added to the below wholesale prices. This would not only provide markedly reduced prices, but a highly transparent pricing

mechanism. This decreased pharmaceutical cost would be incorporated into the various health plans available to Federal employees, without limiting their choice of insurance product. These savings could then pass through to the employer, in the form of decreased premiums, and to the patient/employee in the form of decreased premiums and decreased co-pays.

Mr. Chairman, I want to reiterate my thanks for inviting me to

this hearing. I also pledge my assistance and the assistance of my

organization, Caritas Christi Health Care, in combing through this

difficult struggle of ensuring access, maximizing quality and minimizing costs in health care.

[The prepared statement of Dr. de la Torre follows:]

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Mr. LYNCH. Thank you, Doctor.

Mr. Merritt, you are now recognized for 5 minutes.

STATEMENT OF MARK MERRITT

Mr. MERRITT. Good afternoon, Chairman Lynch and thank you

for your time. My name is Mark Merritt. I am president of the

Pharmaceutical Care Management Association, the PBM Association. It sounds like I have my work cut out for me. But that is what

we do. We are proud of what we do. We work for the large employers’ unions, Government agencies, Medicare Part D, FEHBP of

course, and so forth.

And our clients aren’t small players. They are big, sophisticated,

savvy people who we negotiate very hard against, folks like the

drug manufacturers. So it is kind of odd for everybody else to seem

like the victim. We often feel that way ourselves as we are negotiating for lower prices, pushing for more generics, pushing for biogenerics and so forth.

But we use a number of tools and strategies, to increase generic

utilization. It is a lot more than just the unit cost of the drug that

we are involved in. It is all of pharmacy costs. And we view ourselves not as the cause of the complexity of the system, but a result

of it, in an a attempt to help payers sort through it. To sort

through everything from manufactures retailers, wholesalers, everything that is involved using technology, e-prescribing, different

forms of delivery, like mail service delivery and so forth. All of

which, in different forms, FEHBP uses.

But we are hired to create these benefit packages for different

reasons, I would say, for instance in VA, or Medicaid, because we

are hired by clients who want us to create good benefit packages

that will retain and attract employees. Particularly the FEHBP,

which competes against the private sector all of the time. So to use,

I know this maybe a marginal example, but to use a tool like VA

uses, of limited formularies of pharmacies, of which they can be

dozens of miles away, is not the kind thing that FEHBP would

want to use, even though it may well save them money.

Again, it is the client’s choice. And clients choose all kinds of different ways to save money. But for the record, the GAO and others

have looked at what we do. The GAO has looked at what we have

done at the FEHBP, as we have heard earlier. We do save money

to the tune of hundreds of millions of dollars a year. The OPM has

noted how much we save for them, and that we do it in a consumer

friendly way. These aren’t the old HMOs of 10 or 15 years ago that

saved money by keeping you from doing things and getting you

what you need. We provide broad formularies, broad access, generous packages, lots of retail pharmacies, 60,000 retail pharmacies,

and so forth.

I should note that PBMs are accustomed to a great degree of accountability. We expect it. We get it on the front end, and the back

end, and during the process. These sophisticated purchasers that

work with us, not only are working through their HR departments,

they hire very expensive lawyers and very savvy consultants to

look over all of these contracts before they sign anything with us.

And the Federal trade commission is noted as a very competitive

process. There are lots of different PBMs. I know all of these guys

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are not very fond of each other. They will steal business in a moment from each other for any little extra bit of fat that is left on

there. So the competition drives prices down more than you might

think.

It is important to note on the transparency issue, that it is something to be careful with. Intuitively it seems like the more you see

the better off you would be. But we went through this during Medicare Part D, where there is a provision to make everything transparent in Medicare drug pricing. And the reason it was considered,

I think it was by Senator Grassley and others, is because we need

to save money and pay for the drug benefit, much like the discussions we are having now.

They were surprised when it went to the Congressional Budget

Office, and they found, not only didn’t it save money, but actually

increased costs by 10 percent. I think about $40 billion. And people

wondered why. And it was because, ironically, with transparency,

especially when it is public, when any of the information can be

made public through any means, the beneficiaries aren’t the consumers, but it is all of the people we negotiate against. All the people who we play off against each other. The drug makers, drug

stores and so forth. They are all competing with each other.

And if they know what their competitor’s pricing is, basic economics, so it is not really basic, it is a little more complex than

that, but the basic practice is, that economists agree happen, is it

reduces any interest to underbid their opponents because they

know exactly how low they can go. And if they knew how low we

got some of their opponents or some of their competitors, they

would be surprised and they would price accordingly.

So transparency, we are for it. There is no uniform definition of

it. Different clients want it at different degrees. Some clients don’t

care at all as long as you hit your numbers. Others really want to

pore through the books and see all kinds of different information.

That is the client’s decision. They can decide on the front end.

But in conclusion, I would say that not only do we look forward

to working with you and being helpful, we know this is complicated. That is why we are in existence. We hope that any future

discussions of transparency, in FEHBP or elsewhere, focus not just

on PBMs, but all of the providers in FEHBP, hospitals, physicians,

nursing homes, independent drug stores, drug manufacturers,

wholesalers and so forth.

Because we are about 10 percent of the spend, and we are happy

to be looked at, but if you are looking at a holistic view of this, everybody should be looked at. And I would also hope that any related legislative proposals that you do consider, that you consider

maybe getting them scored from CBL on the front end, to see

maybe how they can be made better, and also to make sure that

the costs are fully understood, if there are costs.

Thank you very much for your time.

[The prepared statement of Mr. Merritt follows:]

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Mr. LYNCH. Thank you, Mr. Merritt.

Let me start with Dr. Needleman. In your testimony, which was

very helpful and we thank you for it. In your written testimony,

you cited there were two different reports there, I believe. In trying

to do an assessment on the Federal Employees Health Benefits

savings from contracting with PBMs. The 2003 GAO report, I think

estimated 18 percent, and then there was another report, called the

PCMA Report, that had estimated savings at 28 percent.

Dr. NEEDLEMAN. Right.

Mr. LYNCH. That is like a 33 percent difference. What do you

think might attribute to that different assessment?

Dr. NEEDLEMAN. It all goes back to the cost base. The

PriceCoopersWaterhouse Report, the 2008 report, was working off

of retail prices. GAO was just looking at drug pricing, not taking

into account the other services, but was looking at wholesale prices

as their benchmark.

Mr. LYNCH. I see. Now the suggestion that you made, that folks

breakout the costs and the profit administratively, have you seen

other plans that break it out that way? And has it been helpful in

those instances?

Dr. NEEDLEMAN. Well, one of the questions I would have asked

the Rear Admiral if I had had a chance to ask him, was exactly

what the pricing looks like under the TRICARE contract. And I

would hope you do that since they, in fact, have straight FSS, or

other negotiated prices for the drug components. There must be explicit pricing for the other components of the contract as well.

Mr. LYNCH. OK. Dr. de la Torre, thank you as well for coming

down at my request, basically. I have to ask you, I was reading the

Boston Globe this morning, and I saw that the unfortunate story

on the severe budget cuts for Commonwealth care, and this is

something that we are all dealing with, and it is that situation that

puts pressure on us here to try to find savings in these different

program. But this action in Massachusetts will no doubt have implications on the national health care debate. I think we are looking at different examples, different models, and as a participant of

that program, do you have certain observations that might be instructive to us during our debate here. What went wrong? And

what perils we might avoid?

Dr. DE LA TORRE. Sure. Thank you. I think that the fundamental

problem is that there is really three components to health care reform, or health care delivery. Which is really access, cost and quality. And you can’t deal with one, i.e., access, without really intertwining the other two, cost and quality. You can’t, without addressing the structure of health care delivery say, OK we are going to

open the doors to everybody, and not expect the cost to choke everybody or the quality to become abysmal.

So I think the very discussion that is happening in this room,

looking at other methods, other structures of providing health care,

is the discussion that needs to be had across all of the components

of health care. So I applaud you and the committee for looking at

this very thing, but I think that is what needs to happen. We have

to look at health care’s entire structure, not just demand increased

access and expect it to not choke us.

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Mr. LYNCH. Unfortunately, we have a tendency to look at the

fastest mover, and what we are seeing is the price of pharmaceuticals rising at a much faster rate, than say hospital-based care.

And I know some of that, at least some of that, is due to higher

utilization rates. These new products, new pharmaceuticals actually substituting for what was previously in-house care.

Let me ask you that. You were on one of those financial shows

the other day, CNBC, or something like that, and they asked you

what are the drivers of costs and you mentioned utilization.

Dr. DE LA TORRE. Yes.

Mr. LYNCH. And for your facilities, your system, I am very familiar with that, how is that a driver? We were looking at the unit

costs and product costs, as Mr. Merritt mentioned, how is that utilization rate a driver of costs?

Dr. DE LA TORRE. If you look at the actual per episode health

care delivery, there is not a lot of profit in it. Most nonprofit hospitals have margins of 1 percent, 2 percent. Last year I think in

Massachusetts, the average community hospital net margin was

less than 1 percent. So I mean, those are not margins that drive

the Exxons of the world, obviously.

So what is driving this? What is going on? You know, a lot of us

think it is utilization. It is, we are using too much health care. It

is not that the price of every unit, let us put prescription drugs

aside as too high. And what drives that? Well, there are three basic

components that drive utilization. One is, which we have heard a

lot about, is preventative, it is defensive medicine. It is physicians

who over-order studies, who do too many tests, too many examines

to kind of prevent themselves from getting sued.

Another component is what I call medicine as a vocation versus

a business. And Dr. Atul Gawande had a great article in the New

Yorker not long ago, The Cost Conundrum, which I encourage all

to read, which addresses this. Which is in some how and in some

locations, a group of health care providers, physicians or hospitals,

medicine stopped being a vocation and became a business. And if

it is a business, then obviously increased utilization makes the

business more profitable. And that becomes a driver in and of

itself. It becomes the culture of the location.

And then the third component is society-driven utilization. We as

a society, and this is where drugs really come into play, we as a

society are convinced that if it is newer and more expensive, it has

to be better. We as a society spend 25, I have heard estimates up

to 30 percent of all health care costs in the last 6 months of life,

because as a society we want to live forever. We as a society are

very proactive on high end surgery, high end medicines, have to be

better than just basic care and preventative care.

So I think those three components really drive utilization, and

are really driving the cost of health care across the United States,

including pharmaceutical benefits through the roof.

Mr. LYNCH. Let me ask you then, as an employer, I think in your

introduction I said that Caritas was 7th or 8th in size of employer,

you mentioned this before in our meeting a few weeks ago, how do

you address the needs as an employer for your folks?

Dr. DE LA TORRE. Well, the things that we are doing is we are

going heavily into primary care. Trying to really emphasize the

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preventative medicine. Try to emphasize the contacts with the primary care physician rather than being tertiary driven. We have our

own insurance plan, and interestingly enough, we run 340B pharmacies through it, which is a marked reduction in cost.

Mr. LYNCH. Explain how that works, because I think just for

someone who is listening and not terribly familiar with the process.

Dr. DE LA TORRE. So on the 340B program, as I was saying, it

entails us to buy drugs in disproportionate share hospitals, certain

high end disproportionate share hospitals, at a markedly reduced

price, statutorily. Some would say an unfairly reduced price. That

is a separate discussion. And what we do, is since our employees

become our patients in a limited network product, then they become patients of the hospital. They buy pharmaceuticals, and we

can give them pharmaceuticals through our hospital pharmacies,

which get the 340B pricing.

And that is a marked reduction, well below anything that we can

get through PBMs and GPOs for our whole hospital, and we have

a fair amount of purchasing clout, as you know. We do between 250

and 300,000 emergency room visits in our system. We do about a

million outpatient visits. We do 80 to 100,000 discharges, ballpark

figures. So we have a fair amount of market clout. But the 340B

pricing really allows us to take it to the next level down.

Mr. LYNCH. Now do you have a gatekeeper type feature on your

own health benefit plan, or even pharmaceutical?

Dr. DE LA TORRE. We don’t really establish a gatekeeper philosophy. We are trying to, and we are in the process of really incorporating IT. We are spending, as you probably know, $70 million

over 3 years in IT to go completely paperless. Not only the hospitals, but all 1,200 of our Caritas Christi network physicians are

going to be on electronic health records within the next year, 18

months. And all of that is going to be tied to our pharmacies also.

We are also bringing in, we have just signed a partnership deal

with Microsoft, that is going to provide health log benefits to all of

our patients so they can manage and be part of their own health

care. I think a lot of this is, in health care overall, is pushing it

out to the home. Pushing it out to the patients, out to the communities, where care is. It can be centered, be more preventative and

also be more cost-effective. You know how much it costs to provide

health care in Boston, not because anybody is ripping anybody off,

but because a parking space recently sold in Boston for $300,000,

so cars have to be put somewhere.

Mr. LYNCH. Right.

Now, Mr. Merritt, I understand the competitive model that is referred to with pharmacy benefit managers; however, in practice, or

at least from where I sit, there is so much complexity there, that

it is difficult to see how folks could compete on price, when you

can’t even figure out what the price is. And it is especially difficult

for some of these plans that might not have the degree of sophistication that is necessary. I mean, when my auditors can’t figure

out what the price is, and they are professionals in that specific

area, how does that competitive model actually work if you have

such complexity there and lack of transparency?

Mr. MERRITT. Well, first of all, not many people do what you are

doing right now, and I applaud you for it. Really taking the time

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to try to learn it. It is very complex. But the savings are real, because it is not just about the drug unit costs, it is about relationships with drug stores, and wholesalers and manufacturers. It is

about using technology.

We championed a bill last year on electronic prescribing and

Medicare, which the president added more funding to in the stimulus package, which we really appreciate. It is a people don’t know

what their drugs are, they don’t know what drugs are out there

that they are taking, they don’t know the cost share, and they don’t

know the alternatives. The doctors don’t know. So there is a big

lack of knowledge there in the physician community.

In terms of how drugs are negotiated, you are right, going up

against the pharmaceutical industry isn’t easy. But it is a competitive system. And I always say this, people don’t have to use a PBM,

and I don’t say that in a kind of snide way, it is just that we add

real value and people pay us to do things and they wouldn’t do that

unless the savings were really big. And again, these unions and

automakers, these are not pushovers, and the Medicare Part D program, which has rigorous transparency, rigorous accountability,

lots and lots of regulations.

So we can deal with that because we do add value. But the only

thing I can say, and the specific answer to your question is, our job

is always to remain on the cutting edge in finding out where any

fat is. We are kind of like the shark in the eco sphere, nobody really wants us there, but we play a vital role of keeping things going,

keeping folks honest. And it is very hard.

But it is very effective. The savings are real and most of the

things that are said about PBMs are said by folks from either the

drug store community or a pharma or others, and then honest people, who just sincerely are trying to figure it out. But when folks

like GAO or the Federal Trade Commission or others look into it,

really do a thorough, exhaustive study, the results are usually pretty good and usually validate what we do and that it adds real

value.

Mr. LYNCH. That has never been in question. I believe you were

here for the testimony of the Inspector General for the Office of

Personnel Management, and despite his description of the difficulties that he was having in ascertaining value and wading through

the complexity of it, he said that the pharmacy benefit managers

were a good deal, a good model to use and were of high value. But

we did say we have a lot of work to do in order to make it more

transparent so that we can be assured of that.

Mr. MERRITT. Can I give you one more example? I don’t mean to

belabor this but, there are a lot of tools that don’t get used because

of special interests, for instance, home delivery. Seniors love it in

Medicare, a 90 day supply, it saves a ton of money, increases adherence, people love it. Medicare could save probably $30 billion

over 10 years if they used that more aggressively. I am sure

FEHBP and other programs could too. But because of pressure

from various special interest groups who don’t want that to happen, like the independent drug store or a lot of your others, it is

always held back.

Mr. LYNCH. I am sorry, Mr. Merritt. What are they not taking

advantage of?

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Mr. MERRITT. Home delivery, mail service delivery.

Mr. LYNCH. Oh. I see. Yes.

Mr. MERRITT. Some retailers use it. PBMs use it. It saves a fortune. Very, very popular with consumers, and we are always encouraging clients to use it. More clients are using it now in these

economic times because it saves money and they realize their people like it. But sometimes policymakers have a tough time addressing that because of other concerns. And so we would say that on

issues like that, on issues like bio-generics, which we strongly,

strongly support, there are policies that can help move this along.

And we want to do our part, as PBMs, but we also want to offer

any counsel we can of ways that we think can help finance health

reform or other things that you are looking to finance.

Mr. LYNCH. I appreciate that.

Dr. Needleman, earlier, in your written testimony anyway, you

mentioned that the HR Policy Association certifies PBMs that comply with certain standards. Do you know if the larger pharmacy

benefit managers like Medco and CareMark, ExpressScripts, that

were mentioned earlier, did these folks have that same certification?

Dr. NEEDLEMAN. The short answer is yes. A large number of

them do. There is actually on their Web site, which is cited in my

testimony, there is a list of which PBMs have been certified by the

program, and it includes a number of the large ones that are currently operating within FEHBP.

Mr. LYNCH. And if they agree to meet those standards, are they

required to do so across business lines. Can they do it in one area

and be in noncompliance in another?

Dr. NEEDLEMAN. Based upon the conversation I had with Ms.

Smith, yes, on the first panel——

Mr. LYNCH. Oh. Sue Hayes.

Dr. NEEDLEMAN. Yes. Prior to the first panel, what she indicated

is the PBMs are offering transparent pricing, and they were also

offering traditional pricing. And the net prices that are coming out

for some reason that cannot explain by any economics I have been

trained in, the transparent pricing is coming out higher.

Mr. MERRITT. I can explain that, if you are interested, but that

is another issue.

Mr. LYNCH. Mr. Merritt, do you want to take a crack at that?

Mr. MERRITT. I will. I will. I am sorry. If I don’t do it nobody else

will.

Mr. LYNCH. That is why you are here.

Mr. MERRITT. That is why I am here. I will play my role here.

The reality is the market dictates what we do. These companies are

not fans of one another, these PBMs. They are looking to steal

business all the time. If clients want a transparent product that is

cheaper and it can be priced for that, they are going to get it. All

of this implies that there is some sort of conspiracy to avoid

transparency——

Mr. LYNCH. You have to admit, it doesn’t look good. When you

have to pay extra for transparency.

Mr. MERRITT. I know. But the reality is all of our companies

would say they have transparent products that are better than

their competing companies. They are transparent in different ways.

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But we do know this, the marketplace is very agnostic on transparency, mostly they just want to hit their numbers. I mean in

other words, they see transparency as a subset of the cost issue.

When costs go up, they want to say, hey, why are the costs going

up. Where is the fat in the system? I want to know what is going

on.

If there is transparency and it doesn’t reduce costs, and this gets

back to what CBO and others have said, that is a problem. If there

were more transparent products that save money, our companies

would be all over it. They know what folks like you are looking at,

and regulators and policymakers. They want to be as transparent

as possible. They want to position themselves as the transparent,

cheaper company. So to the degree that they are able to do that,

they will. Where they are not willing to go, is a situation that will

open up all of the pricing strategies with drug companies and the

drug stores, to the drug companies and the drug stores, either

through consultants or others. They put us in a position when we

are negotiating, of playing poker against these guys with all of

cards facing up, and we can’t negotiate any savings.

So just from pure market, pure selfishness, pure market forces,

any of our companies would love to offer a transparent product that

was much cheaper, if one existed, and to the degree there are

those, they are going to offer them.

Mr. LYNCH. OK. Earlier today we were talking about the possibility of classifying the PBM as a subcontractor, requiring them

to—and I am actually going to introduce legislation to do just this,

get them into that Federal Acquisition Regulation, because I can’t

understand the system you are using now, so I am actually trying

to translate what you are doing into an understandable format, so

that we can figure out what we are paying here.

It seems like a lot to do, to just get some clarity on this, but I

am willing to do it because I don’t think there are that many more

options. What is your response to that? How do you think your

PBMs will respond to that? Being put, all of them, not just some,

but all of the PBMs competing in that Federal acquisition regulatory format?

Mr. MERRITT. Well, we do a lot of different subcontracting work.

I would have to brush up on what exactly the details were here.

And I would also want to see, again, that it really saved money.

And if there were transparency provisions that actually helped you

get where you are going and generate a real savings. That is something that we would want to take a look at.

We would mention, however, and this is an obvious point, I don’t

mean to go back to it but, FEHBP, despite everything we have

heard today is a very popular program, including the drug benefit.

People like it. You don’t hear a lot of people, and maybe you do.

I am not in FEHBP and you probably are. I don’t hear a lot of people saying, gosh, I hate that FEHBP plan. I hear them saying, hey,

it is pretty good. I am a Federal employee. It is one of the perks.

It is why I am there.

Mr. LYNCH. But the taxpayer is picking up the tab.

Mr. MERRITT. Yes.

Mr. LYNCH. Do you know what I mean?

Mr. MERRITT. No, no. I agree.

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Mr. LYNCH. They are not paying for it, so sure, it is a good deal.

Mr. MERRITT. You know it is a good deal, but then the FEHBP

is always competing for employees and doing it on their benefits,

so they don’t want to skimp too much either. So we will give

skimpy benefits, or generous benefits, depending on how much people want to pay and what they want to accomplish. But to answer

your question, we would take a look at it is all I can say. I am not

that familiar with it, but we would be happy to take a look at it

and work with you and your staff on it.

Mr. LYNCH. OK. Well, as I have with the other two panels, obviously I didn’t hit all of the landscape of issues that could arise in

this, but I am going to ask you, if there is some area that we

missed, or some area you wish to amplify or emphasize, just take

2 minutes, starting with Dr. Needleman.

Dr. NEEDLEMAN. Thank you.

First I want to just reiterate the point that has been made by

me, Mr. Merritt, others of the potential of real value added from

the PBMs. They have real expertise in claims administration, drug/

drug interaction, working with the pharmacies, working with patients, all of which should be acknowledged and is a service that

is probably worth paying for. Having said that, everything that Mr.

Merritt said about the role of the PBMs in dealing with clients, and

providers and negotiation could also be said about health insurance

and managed care providers, all operating under administrative

service only contracts, with far more transparencies than we see in

the PBM contracts.

If we are looking at transparency, there are models. I would encourage the committee to take a closer look and get more information about exactly how TRICARE is paying for the administrative

services under its PBM contract, given that it is paying clearly

scheduled prices for the drugs themselves.

Those are my specific comments about the nuts and bolts. I think

one of the issues that the committee needs to think about, is the

nature of the FEHBP program. It has been run as essentially a private sector program with the Federal Government operating as a

private sector employer, in terms of the way it contracts with

health plans. Some of the changes that I have heard discussed

today, some of which I would possibly endorse, if with additional

study, involve changing that relationship. The DOD relationship,

the VA relationship is all very different than an employer relationship with health plans. So you need to think about whether you are

really prepared to walk down that road in order to achieve cost

savings.

And finally, in that regard, part of the way in which the plans

get cost savings, DOD, VA, is through a quite explicit use of

formularies for sole-source, branded, patented drugs. The PBMs are

also doing that and the individual health plans within FEHBP are

doing that. So it is not unusual to see formularies in Federal plans,

but in order to achieve some of the kinds of negotiated price savings that potentially you are talking about here, if you are going

with a single point of entry for the Federal employees, you will

have to be prepared to negotiate a well-constructed, well-thought

through formulary that will apply to all of the Federal employees

rather than the individual formularies that you are seeing in the

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FEHBP plans. You need to think about whether you are prepared

to take that route.

Mr. LYNCH. Very helpful. Thank you, Dr. Needleman. Dr. de la

Torre.

Dr. DE LA TORRE. Sir, I want to begin by just echoing what Dr.

Needleman just said, about centralizing a formulary and really

using the purchasing power of the Federal Government to its benefit. I think as we sit where we are now in health care, fundamental

change needs to happen. It can’t be small incremental change. We

need to do something big and drastic.

We have to get used to the fact as citizens, that we can’t have

everything all of the time in the most convenient location. It is just

too expensive. I think it comes down to something very simple. I

mean what is the cost of the drug, what do you pay the pharmacy,

and the markup. And then everything else is a benefit or a potential service that is provided.

And I think we just need to look at it that simply. I mean, the big pharma said, we are going to help provide $80 billion over 10

years. Well, if you use the FSS schedule, or if you use 340B, hey,

I just found the first $5 to $10 billion for them. They only have $70

more to find on their own. So I would take them up on it.

Mr. LYNCH. That is a great point. Thank you, Doctor.

Mr. MERRITT. First, I should have mentioned this earlier, but I

did use to live in Norwood.

Mr. LYNCH. I knew there was something I liked about you, Mr.

Merritt.

Mr. MERRITT. No. I was born in Virginia, but my next door

neighbor was Chet Curtis, to age myself, I think he was married

to Natalie Jacobson, I am not sure if it was before or after.

Mr. LYNCH. We won’t go there.

Mr. MERRITT. We won’t go there, but anyway, it is too late now

but I thought I would throw it in there. I would just say, in conclusion, thanks for your time, thanks for all of your focus on this.

Spending hours on this. I don’t think I have ever seen a Member

of Congress spend this much time on this. I really appreciate that.

We feel like the more people learn about us, the better. We are not

hiding from that. It is just difficult to explain this sometimes.

I would just suggest that whatever solutions you offer in regards

to transparency, that you don’t make the mistake that the rest of

the Medicare Program has made with doctors and hospitals, where

you move to a cost plus basis. Where you say, well, I don’t care

what you do, and I am just going to pay you a little percentage on

top, I just want to see everything you do.

The danger in that, and again we have seen this with doctors

and hospitals, but in the drug space the danger is, you want to

make sure we have incentives to generate even more savings and

for PBMs to compete against each other to generate more savings.

You don’t want a situation where we get paid the same amount if

we dispense a generic or a brand. Or that if we don’t care if it is

delivered by mail or just at a drug store. If we are going to get paid

anyway, why do we care. That is the one reason why the only part

of Medicare that was saving money, is the one that we administer,

Medicare Part D, which is coming 30 percent under budget, which

is unheard of for a Federal program.

157

Now Med D is interesting because it is the biggest, probably the

most successful Federal initiative that neither party wants to take

credit for, but for whatever reason, it is working and we are part

of it. And it is counterintuitive, but I would just make sure that

the incentives are really strong. Because we can save a lot more

money than we are right now. And hopefully, if there is a silver

lining to this whole era of all of the deficits and so forth, it will

let people and policymakers take a second look at other ways we

can save money. So we would be happy to work with you on ways

to do that. Thank you for your time.

Mr. LYNCH. Thank you. And on that note, we do appreciate your

willingness to come here and help us. And this is an ongoing process. And the bottom line for us is the bottom line. We want to save

money. There are no good guys and bad guys in this thing, we have

an obligation here, to try to provide these products in health care

at the lowest responsible price that we can for our Federal employees.

But again, I want to thank you each for your testimony. You did

a great job, helped the committee a great deal, and I want to thank

you for your time here. Have a good day.

Mr. MERRITT. Thanks, Mr. Chairman.

Mr. LYNCH. This hearing is now adjourned.

[Whereupon, at 6:23 p.m., the subcommittee was adjourned.]

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