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39–938—PDF 2007

S. HRG. 110–264

PRESCRIPTION DRUG PRICING AND NEGOTIATION:

OVERVIEW AND ECONOMIC PERSPECTIVES FOR

THE MEDICARE PRESCRIPTION DRUG BENEFIT

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JANUARY 11, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

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C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 4

Bunning, Hon. Jim, a U.S. Senator from Kentucky ............................................. 4

WITNESSES

Dicken, John, Director, Health Care, U.S. Government Accountability Office,

Washington, DC ................................................................................................... 5

Anderson, Gerard F., Ph.D., professor, Department of Health Policy and Management; and director, Center for Hospital Finance and Management,

Johns Hopkins Bloomberg School of Public Health, Johns Hopkins University, Baltimore, MD .............................................................................................. 7

Haislmaier, Edmund F., research fellow in health policy studies and domestic

policy, The Heritage Foundation, Washington, DC ........................................... 9

Frank, Richard G., Ph.D., professor of health economics, Department of

Health Care Policy, Harvard Medical School; and collateral appointment,

John F. Kennedy School of Government, Harvard University, Cambridge,

MA ......................................................................................................................... 11

Morton, Fiona M. Scott, Ph.D., professor of economics, Yale School of Management, Yale University, New Haven CT .............................................................. 12

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Anderson, Gerard F., Ph.D.:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 51

Responses to questions from committee members, with attachments ......... 66

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 87

Bunning, Hon. Jim:

Opening statement ........................................................................................... 4

Prepared statement .......................................................................................... 89

Dicken, John:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 91

Responses to questions from committee members ......................................... 110

Frank, Richard G., Ph.D.:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 118

Responses to questions from committee members ......................................... 133

Grassley, Hon. Chuck:

Prepared statement .......................................................................................... 137

Haislmaier, Edmund F.:

Testimony .......................................................................................................... 9

Prepared statement with attachments ........................................................... 138

Responses to questions from committee members ......................................... 157

Kyl, Hon. Jon:

‘‘Medicare and the Market,’’ by Mike Leavitt, Washington Post, January

11, 2007 .......................................................................................................... 164

‘‘Experts Fault House Bill on Medicare Drug Prices,’’ by Christopher

Lee, Washington Post, January 11, 2007 .................................................... 166

Page

IV

Morton, Fiona M. Scott, Ph.D.:

Testimony .......................................................................................................... 12

Prepared statement with attachment ............................................................. 168

Responses to questions from committee members ......................................... 178

Roberts, Hon. Pat:

Prepared statement .......................................................................................... 185

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 187

Snowe, Hon. Olympia:

Prepared statement .......................................................................................... 190

Wyden, Hon. Ron:

Opening statement ........................................................................................... 4

FDA approved products developed with technologies from the NIH Intramural Research Program ............................................................................. 192

COMMUNICATION

Academy of Managed Care Pharmacy ................................................................... 195

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PRESCRIPTION DRUG PRICING AND NEGOTIATION: OVERVIEW AND ECONOMIC PERSPECTIVES FOR THE MEDICARE PRESCRIPTION DRUG BENEFIT

THURSDAY, JANUARY 11, 2007

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Lincoln, Wyden, Schumer, Stabenow, Cantwell, Salazar, Grassley, Hatch, Kyl, Smith, Bunning,

and Roberts.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

I look forward very much to this hearing because I think it is a

great opportunity for this committee to, in a thoughtful, considered

way, find the facts in as bipartisan a way as possible and try to

find a solution to this basic question.

I supported the Part D drug benefit a couple of years ago because

I felt it was the right thing to do. I felt that seniors needed some

help. They needed a way to get a drug benefit.

Clearly, with all the new drugs that have been invented, and

people living longer, it just made sense that, in addition to Part B,

that there should be a direct benefit for drugs to be available to

senior citizens.

The legislation that we passed a couple of years ago was not perfect, but it was a start. The old saying around here, which I subscribe to, is we cannot let perfection be the enemy of the good. It

was not a perfect bill, but it was a good bill. It was a start. It

moved, in my judgment, in the right direction.

I think, even though it was roundly criticized by many back then,

I think most of those who criticized and tried to prevent the passage of that legislation now would agree that it is a good thing that

Part D is in the law, because so many seniors are getting the benefit.

The program started out with lots of bumps, lots of delays. It is

a big program. It is difficult for CMS to line up all that had to be

put together for the benefit to begin to work in a fairly seamless

2

way. Many seniors had lots of questions, legitimate questions.

There was much confusion.

But over time, it is my judgment that most seniors have begun

to think, well, gee, after all those problems—and there still are a

good number of problems—that they are basically satisfied. I know

that is true in my State of Montana, where earlier there were a

good number of dissatisfied people, but now seniors are generally

much more satisfied.

I believe that the program is still too complex for seniors. I think

there are way too many choices that seniors have to make which

tend to prevent seniors from making a choice.

I think it is probably a good analogy to the insurance program,

the Medigap insurance program, where there were way too many

choices a long time ago, and I think a lot of seniors have been

taken advantage of. But we stepped in and we tried to correct that

problem. I think the same would apply here today.

The real question, though, now, for this committee at this point

is what to do about the provisions in the current law prohibiting

the Secretary from interfering, if you will, in the market. Of course,

the bill that is probably going to pass the House places this issue

before us.

It is my hope that, by asking a lot of good questions and getting

a lot of good answers from our five panelists—and we thank you

very much for coming to join us here today. We chose you because

we think you know what you are talking about and you can help

this committee make some very wise, considered choices. So I

thank you for coming.

On the one hand, there are those who say the current program

is working, that the Secretary should not interfere, the Secretary

should not set price, the Secretary should not set formularies. It is:

let the market work because the market is working pretty well, citing some reductions in the cost of the program—the Part D program is not costing as much as was earlier anticipated—and pointing out that the lower prices that some seniors are paying due to

negotiation between the drug plans and the drug companies, some

of those savings are being passed on. I do not know the degree to

which or how much.

There are those, on the other hand, who say, wait a minute.

With the massive power of Uncle Sam, with the massive purchasing power of CMS, we should get a much lower price from the

pharmaceuticals. The VA system is often mentioned as an example.

VA prices are often a lot lower than those under Part D.

So my goal here is to try—and I know it is almost impossible,

but I am going to try—to get all of us to kind of minimize the rhetoric here, minimize the attacks against the other side, directly or

indirectly, but stand back a little bit and find out what is really

going on here.

To what degree is the market working and where in the current

program is it working? To what degree is it not working, and where

is it not working? For example, in the second category, some people

say, well, cancer drugs. The monopolistic power of a single cancer

drug is the reason why cancer drugs are way, way too expensive

and we probably do need a little more intervention by the Secretary, jawboning or whatever, to get those prices down.

3

There are others who point to dual eligibles and Medicaid reduction, and is that not something that we should apply here, too? It

is my belief that a lot of that analysis is somewhat on the surface.

When you go down to the third level of examination of what is

going on, we can find better ways to get lower prices for seniors

in a way that also means that seniors will tend to get good drugs

off in the future, too. We cannot kill the goose that lays the golden

egg here.

An area that I think is worth pursuing, an area that when it

comes time for questions I am going to ask the panelists a lot

about, is basically this: first, why can we not have a lot more comprehensive comparison—cost comparison, efficacy comparison—of

drugs and make that a stronger analysis, have NIH do a lot more

than it currently does, and make that information public so that

doctors, hospitals, and patients have a better idea of the cost of this

drug procedure versus another, and the efficacy of that drug procedure versus another?

I tend to think that the more that is widely known and the more

NIH does the analysis—because currently it is my understanding

that NIH does that analysis only on a very few drugs. But if NIH

were to expand that analysis on many, many, many more drugs,

particularly the ones that are most used and so forth, that that

would be very, very helpful and then the price will tend to come

down.

Second—and I am going to ask the panelists about this—it is my

understanding that HHS does have one set of pricing information,

that is, what the beneficiaries pay the pharmacies. That is available and the Secretary has that information.

The second set of information the Secretary has is the net discounts and the prices that the drug companies charge the plans.

That also is available. The Secretary has that information as well.

So I am going to ask you panelists when it comes time for me

to ask questions, why can both of those sets of pricing information

not be transferred to public research entities like CBO, GAO, CRS

and so forth to analyze what is happening here so they can then

tell us what is working and what is not working?

I hope the panelists can shed some light on all that so, in the

long run if all this works, we are going to get better prices, with

more transparency, with more analysis, comparative analysis, and

efficacy of plans without the heavy hand of price-setting and regulation. Now, maybe that does not work, I do not know. But it is

an area that I think we should pursue.

Again, our goal here is for beneficiaries to get the lowest price

not only today, but for tomorrow and future years. Our goal here

is short-term, and it is also long-term.

Senator Grassley is not here. He plans to be here very soon. Ironically, I think Senator Grassley is on the floor giving a statement

against the Pelosi bill. But, anyway, he is not here right now.

I just wonder, since he is not here, do any other Senators want

to make very brief, short statements before we proceed with the

witnesses? Very brief.

The Senator from Oregon.

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OPENING STATEMENT OF HON. RON WYDEN,

A U.S. SENATOR FROM OREGON

Senator WYDEN. Mr. Chairman, thank you. Thank you for your

very thoughtful assessment of where we are.

My own view is that it is possible to show that Medicare can be

a smarter shopper without going to some form of price controls.

That is, in fact, what Senator Snowe and I have been pushing for

3 years.

We have introduced another version of our legislation. In particular, when you have a drug that is a sole-source drug, I think

there is an area where you do need some negotiating power.

That, for example, is what former Secretary of Health and

Human Services Tommy Thompson did with Cipro: there were no

price controls, there was no uniform formulary, but the government

used its bargaining power to hold down costs.

I would also point out that many drugs are developed with taxpayer funds. For example, Taxol came from a trash tree in the Pacific northwest where essentially all the heavy lifting was done by

the taxpayers of this country. There again, without price controls,

without a uniform formulary, I think there ought to be the possibility of negotiating.

I will say, colleagues, I do not think Medicare is that different

today than somebody going to Costco buying toilet paper one roll

at a time. Nobody shops that way. They do not shop that way in

Kansas, Oregon, or anywhere else.

So let us, colleagues, look for ways to avoid price controls, uniform formularies, and approaches that will discourage innovation,

but rather promote, as Senator Snowe and I have sought for 3

years, smart shopping so as to take steps that are good for seniors

and for taxpayers.

I want to wrap up by thanking you, Chairman Baucus, because

you and your staff folks have been exploring this very constructively with us.

The CHAIRMAN. I appreciate that. Thank you, Senator.

I would like to go to the panel, but will let someone on this side

of the aisle speak if he or she wants to. But I would like to get on

to the panelists, too.

Senator Bunning?

OPENING STATEMENT OF HON. JIM BUNNING,

A U.S. SENATOR FROM KENTUCKY

Senator BUNNING. Thank you very, very much.

I just want to review from the beginning what we tried to set out

to do in Medicare Part D. Just very short: we tried to give those

who did not have a drug benefit a drug benefit.

According to an independent survey by J.D. Power & Associates,

75 percent of all Medicare beneficiaries enrolled in Part D are

happy with their drug coverage. CMS recently announced that the

average monthly premium for Part D in 2007 is $22 a month,

which is substantially less than the $37 that was projected. Beneficiaries are averaging savings of almost $1,200 a year.

The drug benefit cost $13 billion less than expected in the first

year, and more than 38 million Medicare beneficiaries have drug

5

coverage, and most of them, 70 percent, will not be affected by any

donut hole.

So what we set out to do, we accomplished. Unbelievably, as you

have said, Mr. Chairman, in spite of the fact that there were a lot

of naysayers, we have a success, a very big success.

I was interested in a CBO letter that was sent yesterday at the

request of Chairman John Dingle. He requested a letter from CBO.

It said that, according to CBO estimates, H.R. 4 would have negligible effect on the Federal spending—H.R. 4 being the bill that is

in the House presently—because we anticipate the Secretary would

be unable to negotiate prices across the broad range of covered Part

D drugs that are more favorable than those obtained by PDPs

under the current law.

So I say that before we get to our panel, because I want to hear

what our panel has to say, and I want to be able to ask some specific questions of the panel.

Thank you.

The CHAIRMAN. Thank you.

Let us get to the panel now, if we could. I want to start out by

introducing the panel. We have Mr. John Dicken, who is Director

of Health Care for the U.S. GAO; Dr. Gerard Anderson, who is a

Ph.D. and professor, Department of Health Policy and Management, and director at the Johns Hopkins Bloomberg School of Public Health; Edmund Haislmaier, who is a research fellow in health

policy studies at The Heritage Foundation; Dr. Richard Frank, professor of health economics, Department of Health Care Policy at

Harvard Medical School, with a collateral appointment to the John

F. Kennedy School of Government, also at Harvard; and Dr. Fiona

Scott Morton, who is a professor of economics at the Yale School

of Management, Yale University.

So, Mr. Dicken, why don’t you proceed? Your statements will

automatically be included in the record, but I encourage you to stay

within 5 minutes.

STATEMENT OF JOHN DICKEN, DIRECTOR, HEALTH CARE, U.S.

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Mr. DICKEN. Thank you, Mr. Chairman, members of the committee. I am pleased to be here today as you examine approaches

to prescription drug pricing and negotiations.

In the United States and other countries, rising prescription drug

costs have led to a wide range of market-based and governmental

approaches to reduce drug spending. Some of these approaches include negotiations between drug purchasers and drug manufacturers.

Prescription drugs, as you know, are a particular focus for the

Federal Government as Medicare begins the second year of the

Part D drug benefit. Part D is characterized by multiple competing

private plans. These plans may differ on the drugs they cover, the

pharmacies they use, the prices they negotiate with drug manufacturers and pharmacies, and the costs to enrollees.

MMA prohibits the Federal Government from interfering with

price negotiations between Part D plan sponsors and drug manufacturers. As you know, a bill recently introduced in the House proVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
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poses amending MMA to require the Secretary of HHS to negotiate

with drug manufacturers on behalf of Medicare beneficiaries.

My remarks today provide a broad overview of the approaches

used to negotiate drug prices by governments in other countries, by

private payors in the United States, and by Federal programs other

than Medicare Part D. My remarks are based on previous GAO reports and other relevant literature.

Approaches for negotiating drug prices vary among Federal programs in the United States. While these approaches reflect U.S.

laws, markets, and health care delivery and financing, there are

also elements common to some of the approaches used by other

countries and by private payors in the United States. Other factors,

such as scope of coverage and the use of formularies, influence

drug negotiations.

In other countries, governments establish drug prices in three

main ways. First, ceiling prices restrict market negotiations by establishing maximum prices drug manufacturers can charge, allowing purchasers to negotiate lower prices directly with manufacturers. For example, Canada has a review board that can fine drug

manufacturers that sell drugs at prices higher than ceiling prices.

Second, reference prices use local or international price comparisons of drugs classified in a group as therapeutically similar to determine a single or maximum price for all drugs in that group. Germany sets prices this way, matching the price of all drugs in a

group to the price of the lowest-priced drug in the group.

Third, profit limits establish controls on drug manufacturers’

profits, requiring drug manufacturers to lower prices or pay rebates

if their profits exceed certain levels. This approach is used in the

United Kingdom.

Private payors in the United States, such as employer-sponsored

health plans, often contract with pharmacy benefit managers, or

PBMs. PBMs compete in the market, in part based on their ability

to negotiate reduced prices with manufacturers and pharmacies.

PBMs generally receive compensation from health plans and

from retaining some of the savings they negotiate with pharmacies

or manufacturers. PBMs influence price negotiations with manufacturers through managing formularies and through the volume

and market shares they represent.

Federal programs in the United States combine some of these approaches. Some programs set ceiling prices, others establish prices

by referencing prices negotiated by commercial U.S. payors, and

still others negotiate with manufacturers, either directly or through

contracted private plans.

A few examples. First, the VA’s prices for prescription drugs may

be the lower of a ceiling price, the price listed on the Federal supply schedule, or the price that VA can negotiate with a manufacturer. VA’s national formulary, which comprises at least one therapeutic alternative in categories of drugs, also influences VA’s

prices.

Second, State Medicaid programs reimburse retail pharmacies

for dispensing drugs to beneficiaries at set prices, typically, the

lowest of several prices established by the States within Federal

limits. State Medicaid programs receive rebates from drug manuVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
7

facturers that are meant to take advantage of the best prices private payors negotiate, including discounts and rebates.

Finally, for health plans offered to Federal employees, retirees,

and their dependents, the Federal Government uses a different approach modeled after other large employers’ health benefits.

Under this approach, rather than negotiating directly with manufacturers, the government contracts with participating health

plans that typically use PBMs to negotiate drug prices and manage

plans’ specific formularies.

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

to answer any questions you or members of the committee may

have.

The CHAIRMAN. You are good, with 10 seconds left to spare.

[The prepared statement of Mr. Dicken appears in the appendix.]

The CHAIRMAN. Dr. Anderson?

STATEMENT OF GERARD F. ANDERSON, Ph.D., PROFESSOR,

DEPARTMENT OF HEALTH POLICY AND MANAGEMENT; AND

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

HEALTH, JOHNS HOPKINS UNIVERSITY, BALTIMORE, MD

Dr. ANDERSON. Thank you. It is a challenge.

Mr. Chairman, members of the committee, let me begin by stating that I believe in markets. Now let me qualify that statement:

I believe in markets when certain circumstances are met, and unless those circumstances are met there will be distortions in the

market, or even market failure.

Classic example of a market failure is a monopoly. When the

Federal Government gives a pharmaceutical company a 17-year

patent for a drug, the government is effectively creating a monopoly. I am not advocating removing patents for drugs, because they

serve a very valuable purpose.

What I am saying, though, is it is important to monitor if the

marketplace is working when the government has created a monopoly. My written statement contains numerous other examples of

market failure for the prices that the Part D plans are paying.

So what do I believe? I believe, as the first step, the Congress

should require the Secretary of HHS to simply collect data on the

lowest price that any Part D plan obtains for each drug, and then

compare it to the prices obtained by the VA, Medicaid, and Canada,

and write a report.

Because the report will show relative prices, it will show where

the Part D plans are paying a high price. As I said earlier, I believe

in markets. But as Ronald Reagan said, ‘‘Trust, but verify.’’

In the report, the lowest price obtained in the marketplace by

any Part D plan would be compared to the price that the VA’s Secretary has negotiated with the pharmaceutical companies. Medicaid is an appropriate comparison because Medicaid has been paying for drugs for many years and has an extensive formulary.

Canadian prices are a relevant comparison, for two reasons.

First, because they will show what other countries are paying for

drugs, and second, and probably more important, a large price differential between the U.S. and Canada will cause a substantial

number of American seniors to obtain drugs from Canada.

8

Without access to actual data on prices paid by Part D plans, I

can only suggest where Part D plans are paying higher prices. Provisions in the MMA prevent the release of actual price data.

First, it is likely the prices for generic drugs will be comparable

or even lower in Part D plans.

Second of all, I expect that Part D plans are paying substantially

higher prices for drugs for dual eligibles than the prices the Medicaid program was paying before the passage of the MMA. Ultimately, the Medicare program is paying these higher drug prices

because the Medicare program pays for the dual eligibles.

Third, it is likely that Part D plans are paying higher rates for

many brand-name drugs. In my written testimony I discuss some

of the market constraints that interfere with the market for brandname drugs.

Finally, the fine print of the CMS actuary report shows that drug

prices will continue to rise at above 7 percent per year, with Part

D plans not becoming any more effective in controlling prices over

time.

Negotiations are possible with an open formulary. The Secretary

should start negotiating prices for drugs that Part D plans are paying when they are paying much higher prices.

Assume for a moment that the best price that any of the Part D plans could get for a drug is $10, and now assume also that the

best price that the VA, Canada, and Medicaid are getting is $1.

In this case, the Secretary should begin by simply asking the

pharmaceutical company to explain, why is it charging Part D

plans 10 times more for that same drug? I cannot imagine any

pharmaceutical company wanting to receive that call. The Secretary has other options to consider, but I would guess they would

probably be unnecessary.

In preparing my written testimony, I read the editorials that

have been written on this issue. As I read them, I was reminded

of the Goldilocks and the three bears story and the ‘‘just right’’ solution.

Some editorials have proposed that the Secretary will be an ineffective negotiator because the Secretary cannot restrict the formulary. However, under this proposal, the Secretary will be negotiating prices only where the marketplace is already paying the very

high prices.

Some editorials have argued that the Secretary will be such an

effective negotiator that it is going to stifle research and development. However, because the pharmaceutical companies have already accepted the prices with the VA, Medicaid and Canada, that

should be an acceptable starting place for negotiations.

I also find problems with the logic that, simply because the Medicare program is such a large payor for drugs, that it must pay

higher prices than the VA, Medicaid, or Canada.

First of all, large purchasers never pay the highest prices. Second

of all, the Federal Government is already supporting pharmaceutical research through NIH. Finally, the Medicare beneficiaries

are facing a donut hole, and they should not be the ones to be

asked to be the primary supporter of research and development.

Just like Goldilocks and the three bears, I am looking for the

‘‘just right’’ solution. In my opinion, a ‘‘just right’’ solution is for

9

Congress to repeal the non-interference clause and require the Secretary to identify places where the Part D plans are paying much

higher prices. The Secretary then negotiates prices for those relatively high drugs only. A call by the Secretary may be all that is

needed to conclude that negotiation.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

[The prepared statement of Dr. Anderson appears in the appendix.]

The CHAIRMAN. Mr. Haislmaier?

STATEMENT OF EDMUND F. HAISLMAIER, RESEARCH FELLOW

IN HEALTH POLICY STUDIES AND DOMESTIC POLICY, THE

HERITAGE FOUNDATION, WASHINGTON, DC

Mr. HAISLMAIER. Thank you, Mr. Chairman, for inviting me; Senator Grassley, members of the committee.

In my written testimony, which you have, I discuss the economics of negotiation in any area—I think that we may want to refer

to that in the Q&A at some point—how price competition operates

in the pharmaceutical marketplace, the strategies that private sector negotiators employ, and the additional options available to the

government as well.

Three of my basic points are as follows.

First, it may be theoretically possible for direct government negotiation to lower drug prices further.

Second, in order for the government to obtain pricing concessions

greater than those obtained by competing private purchasers, the

government would have to employ tools not available to private

players. Specifically, the government would have to be willing to

broadly restrict market access for disfavored products and/or willing to limit or revoke the intellectual property right of producers.

Of course, those actions would produce other significant economic

and political costs.

Third, even disregarding those other potential costs, government

attempts to achieve lower unit prices than those negotiated in the

private market will not necessarily translate into lower program

costs. That is because program costs are a product not only of the

prices paid, but also of the volume and mix of pharmaceuticals

used and prescribed.

Now, I would encourage you to think about that because, in all

of the debates about pharmaceuticals, that is an extremely important point: pricing is only half the equation.

Indeed, the economic literature on the experience with government price setting, not only for drugs but other items, repeatedly

finds that artificially lowering prices below competitive market levels does not necessarily reduce total costs. Rather, it induces consumers and providers to alter their behavior in ways that frequently increase aggregate costs.

Now, Mr. Chairman, I would like to now present to the committee some additional information that was not completely available as I was preparing my remarks. With your permission may I

share some charts with the committee?

The CHAIRMAN. Certainly.

10

Mr. HAISLMAIER. In preparing for this hearing, I came across

some interesting data that has been largely overlooked in this debate. The data I refer to indicate that, in fact, there appears to already be evidence that the competitive private market in Medicare

Part D is significantly reducing total program costs below the levels achieved by a system of government-mandated price discounts.

If validated, it would mean that introducing into the program

some new mechanism of government negotiation might actually result in an increase in total cost.

The CHAIRMAN. I am sorry, I cannot see it from here. What is

the green line and what is the red?

Mr. HAISLMAIER. I am about to get to that, if you could give me

a minute, Senator.

The CHAIRMAN. Sure.

Mr. HAISLMAIER. This is a little background information. The

data are recent substantial downward revisions by both CMS and

CBO to their estimates for State government payments to Medicare

Part D. That is what we are showing.

The green is what CBO previously projected, and there is a dotted line as well. There are two projections there, very close. This

year, they have significantly lowered their cost estimates. I have a

similar chart that maybe we could put up for CMS which has similar reductions.

Now, a little background information to understand the significance. As you will recall, the legislation that established Part D

provided that the dual eligibles—that is, those low-income Medicare beneficiaries who are also covered by Medicaid—would no

longer receive their drug coverage through Medicaid, but would instead be covered by Part D, the same as other seniors.

Now, of course, under Medicare the cost of drug coverage was

funded out of a combination of State and Federal payments, whereas, under Medicare Part D, it is all Federal, so in doing this the

legislative drafters realized they would be giving the States a budget windfall and they sought to take that back.

So Congress included provisions that say the States have to pay

the Federal Government money equal to what they would have otherwise spent on covering the dual eligibles.

That is what we have estimates of. How much do the States have

to pay back to the Federal Government? These estimates have

come down now that actual program costs are available. Both CBO

and CMS have made substantial revisions.

Now, Medicaid, as noted, employs a mandated price discounting

strategy, whereas Medicare Part D employs a competitive model of

private players trying to negotiate better deals. So my hypothesis

is that these changes in estimates may indicate that Medicare Part

D is producing better results than the Medicaid program.

With your indulgence—I realize I am running out of time—we

can go through the possible explanations. Otherwise, I could get

into that later.

The CHAIRMAN. I think, in fairness to the other witnesses and

Senators, we will wait.

Mr. HAISLMAIER. Fine. Thank you, Senator.

The CHAIRMAN. Thank you.

11

[The prepared statement of Mr. Haislmaier appears in the appendix.]

The CHAIRMAN. Dr. Frank?

STATEMENT OF RICHARD G. FRANK, Ph.D., PROFESSOR OF

HEALTH ECONOMICS, DEPARTMENT OF HEALTH CARE POLICY, HARVARD MEDICAL SCHOOL; AND COLLATERAL APPOINTMENT, JOHN F. KENNEDY SCHOOL OF GOVERNMENT,

HARVARD UNIVERSITY, CAMBRIDGE, MA

Dr. FRANK. Good morning, Mr. Chairman and members of the

committee. I want to thank you for inviting me to discuss drug

prices under Part D.

The drug benefit has clearly improved the lives of millions of lowincome Americans by offering them a route to affordable prescription drugs that are critical to their health and their well-being.

Part D is also projected to add more than $1 trillion in cumulative spending to the Medicare program over the period 2006 to

2016, and so this raises the question of whether prescription drugs

under Part D are being purchased in the most cost-effective manner.

Now, answering this question requires us to balance today’s

prices and spending against the future supply of innovative and potentially important drugs.

In my view, we can best think about Part D prices in terms of

three market segments, and let me just tell you what they are. The

first is drugs purchased on behalf of people who are dually eligible,

which is about 29 percent of the people participating in Part D.

The second is the drugs that face multiple branded or branded and

generic competitors purchased on behalf of non-duals. The third are

drugs that are unique and face little or no competition. I will discuss each in turn.

For the most part, the second group—that is, the drugs with the

multiple therapeutic competitors—appear to be obtaining prices

consistent with a market that is working. As a result, I think this

segment of the market should largely be left alone. I will, therefore,

direct most of my remarks at the other two segments.

Let me start with the dually eligible. Prior to 2006, the dually

eligibles’ drugs were purchased for them at the lower of the best

price on the private side, or 15.1 percent below AMP, average manufacturer price. Comparing the old and the new prices is a little bit

difficult, for some of the data reasons that you have raised. But we

can get some important clues about this from examining the filings

to the SEC of major drug manufacturers.

Major drug manufacturers that sell prescription drugs that are

disproportionately used by the duals, like anti-psychotic medications, report significant reductions in the size of the rebates that

they are granting during the first 6 months of the drug benefit. So,

in effect, the switch has led to notable price increases for that segment of the market.

Some of the numbers reported during the first 6 months of 2006

are impressive; for example, the number that has now been cited

of $325 million to Pfizer’s bottom line for the same drugs and the

same people.

12

Now, given that the drug companies appear to be making sufficient money to enter this market prior to 2006 suggests that the

old prices were not hampering innovation, at least in this area.

This evidence suggests that price increases stemming from the

switch could be brought down without adversely affecting R&D.

Now, let me turn to the unique drugs. Competition only keeps

prices down when there are competitors. In the case of prescription

drugs without good substitutes, prescription drug plans, or PDPs,

are in a potentially weak bargaining position.

For high-cost drugs, Part D participants are well-insured and

PDPs are well-subsidized. In these circumstances, the combination

of patents, the lack of therapeutic competitors, and generous insurance effectively put the patent system on steroids.

This allows manufacturers to effectively name their price, possibly at the expense of a worrisome Federal budget, yet taking action here is a tricky matter because unique and innovative drugs

are exactly the drugs you want to be rewarding financially.

So how big a problem is this? Between 1970 and 2000, we were

generating about three to four of these unique new drugs a year.

However, we have been considerably below that in recent years—

perhaps we should hope that this becomes a larger problem—but

we do not yet know how big a problem this is, or will be. However,

I believe the threat is real.

Therefore, I believe careful monitoring of these drugs and their

prices—and I mean their transaction prices—should go ahead. Furthermore, the government should be prepared to take action if such

a problem turns out to be a major one. I would suggest that this

be done by considering a scheme for temporary administered prices

until sufficient entry occurs to guarantee competition.

These prices should be designed to preserve R&D incentives, recognize health benefits produced by specific products, and limit economic rents paid by the Medicare program.

So, in conclusion, to address these two areas, the dually eligibles

and the drugs they use and unique drugs, the government needs

to have flexibility to act if it turns out they need to act.

Thank you, sir.

The CHAIRMAN. Thank you very much. Very succinct and very,

very helpful.

[The prepared statement of Dr. Frank appears in the appendix.]

The CHAIRMAN. Dr. Morton?

STATEMENT OF FIONA M. SCOTT MORTON, Ph.D., PROFESSOR

OF ECONOMICS, YALE SCHOOL OF MANAGEMENT, YALE UNIVERSITY, NEW HAVEN, CT

Dr. MORTON. Good morning. It is my pleasure to present at these

hearings.

Let me plunge into the four points I would like to make. First

of all, Medicare Part D is potentially so large that its prices will

be average prices. One thing I just want to get across before discussing some of these harder issues is that, if you are half the market, you cannot get a below-average price.

So seeking low prices is a good goal, but thinking that seniors

in America are going to get a discount is just not arithmetically

13

possible because seniors are now buying so many of the drugs out

there. That is the first point.

The second point is, another drawback to the size of Part D is

that reference pricing becomes essentially impossible. What do I

mean by reference pricing? That is when you set the price of Medicare to be equal to the VA price, or the Canadian price, or 10 percent less than Kaiser Permanente’s price, or something like that.

Manufacturers would prefer to raise prices to the VA than they

would to sell to Medicare at a low price, and that is what they will

do, they will just raise those prices. So what we do is, we harm the

VA or we harm Canadians and we do not get ourselves lower

prices. The reason that will not work is because Medicare is a very

large market, so that is off the table.

Third, the way you get low prices in the pharmaceutical industry

is by the ability to exclude drugs. What do I mean by that? You

identify a few therapeutic substitutes and you essentially hold an

auction. I am happy to buy any one of these cholesterol drugs.

Whoever gives me the best price is the one I am going to buy from,

and everybody else gets none of my business.

When you can do that, you force price competition. Even though

those manufacturers may have intellectual property over that drug,

you are going to force price competition among those drugs and

that is how you get a low price. This is sometimes called moving

market share.

So this is why some commentators have said allowing the Secretary to negotiate with drug companies, if the Secretary cannot

exclude anybody, is not going to do anything.

So they phone up a representative drug firm and say, I would

like you to offer a lower price. The answer is, why? You have to

buy all the drugs for everybody on Medicare and so you have to buy

my drug, so why would I offer you a lower price?

So unless we are going to give the Secretary the ability to announce that the price is 73 cents, I do not think you are going to

get anywhere by just allowing the Secretary to negotiate, in and of

itself. I do not think a national formulary is a good idea, and we

can talk about that later if you would like.

So what should we do about the high prices Medicare is paying

in some of these categories? I understand the feeling that we have

no limit because we have insured buyers, and in protective classes

we have plans that cannot exclude very well.

The thing I am afraid of is policies like: let us take 40 percent

off the top; we are a big buyer, we are the government, we cannot

afford this, let us just reduce prices. I think that is a terribly blunt

instrument.

I think you lower prices for drugs that are delivering great value

and you keep prices too high, arguably, for drugs that are useless.

So, I really think that is a bad idea because we ultimately care

greatly about the incentives for entrepreneurs to keep on inventing

these drugs.

So how do we get the right price? Ideally, we like to use the market because we are all Americans, but the market depends on buyers having good information. I talked to you before about, the way

you get a low price is deciding that three or four drugs are equivalent, and sort of holding an auction between them.

14

Well, how do you know they are equivalent? You have to have

some studies that show that they are effective at curing the same

disease in kind of the same way.

So this is where I would echo Senator Baucus’s comments about

the NIH being needed to do cost-effectiveness studies. What I

would recommend is, if a drug is in a protected class where the

plan is not allowed to do formulary management very effectively

because that is what the legislation says, and we are spending a

lot of money on that drug, that would be a trigger to send that

drug for a cost effectiveness study to NIH. Then we could learn

what was going on.

It might be that NIH concludes that that drug is no better than

some others, and then plans could feel free to replace that drug

with something cheaper. We might conclude that drug is fabulous

and keeps people out of the hospital and saves the program lots of

money, in which case we might say plans have to have that drug

on the formulary.

Or we might discover that it is better for some people and not

for others, and plans might be allowed to do a step therapy, start

people on this drug and move them if it does not work.

So there are a variety of outcomes there. Instead of legislating

a price or letting a Secretary pick a price which ultimately comes

out of thin air, you would still be relying on plans to administer

the market, but the plans would have better information and a better ability to do that.

Let me just say that it is not just releasing the information that

is going to matter. So, for example, we could make the result of a

cost-effectiveness study public, and that, of course, would do a lot.

But if that information said the drug is really expensive and it

keeps people out of the hospital, do the PDPs want to cover it? Certainly not. They do not care about what happens to hospital costs.

They are concerned, because they are private players and they

want to make money, with keeping the drug benefit down.

So from your point of view, from the government’s point of view,

we really care about the interactions between drug costs, hospital

costs, and physician costs. So if a drug is very expensive, and yet

it saves 10 times its expense in hospital bills, we may need to give

CMS the ability to mandate a drug is on a formulary so that it affects the bottom line to the taxpayer in the appropriate way.

So I think that, therefore, ideally we would like to set up an

agency, have NIH have a cost-effectiveness center that is permanent, in a sense, because we care in an ongoing way about studying

drugs so that we can set up the broader Medicare program cost effectively.

So, in short, I think there are a lot of options to consider. I think,

like Dr. Frank, that the regular drugs with therapeutic substitutes

probably do not need reform. I think we could consider loosening

formulary restrictions in the protected classes because this would

allow plans to create competition between drugs. Right now, those

restrictions prevent that.

I would favor triggering cost-effectiveness studies to allow plans

to increase competition between drugs, and at the same time rewarding really valuable drugs.

15

We could consider paying physicians to help enrollees choose

plans. The way you compare a plan——

The CHAIRMAN. I am going to have to ask you to wrap up, Doctor.

Dr. MORTON. All right. I have one last remark, which is, we could

also consider shifting the dual eligibles back into Medicaid. This

would reduce the adverse selection problem and, as Dr. Frank

pointed out, might save us some money.

Lastly, the New York Times had an article this morning about

generic versions of biologics. I think that is a serious issue for the

future.

Thank you.

[The prepared statement of Dr. Morton appears in the appendix.]

The CHAIRMAN. Thank you very, very much, all of you.

I would like to ask Dr. Frank to expand a little bit more on what

we do about the third class, that is, those where there is more monopolistic power, and how we get at that. You suggested that

maybe just a call from the Secretary inquiring what is happening

might yield benefits. But how do we get at those unique drugs? It

seems like the costs are way too high, in many cases.

Dr. FRANK. The evidence that is out there suggests that there are

pretty big ones, and the ones that seem to have particularly high

shares of users among the elderly have had quite a run-up recently. So, it is a point of concern.

As I said in my remarks, I am a little bit concerned about moving too aggressively on this because, as I noted, these are the drugs

that really make a difference in people’s lives. So, you have to be

careful.

I think the first thing to do is to collect the data and to collect

the detailed data, and to do as you suggested, have CBO, GAO, or

somebody like that really look very carefully at them.

If in fact it turns out to be a problem, then there are a range

of options, ranging from sort of administered prices, at least temporarily until competition takes over, to some kind of arbitration.

The CHAIRMAN. But is there a lesson here with some of the earlier HIV drugs, anthrax? Are there a couple of instances where the

Secretary did jawbone? Cipro is a good example.

So is that something that might work here?

Dr. FRANK. Yes. I think that allowing yourself some flexibility,

collecting data, and then allowing conversation, that certainly in

the past has produced results.

The CHAIRMAN. I would like to follow up on Dr. Morton’s suggestion that NIH do a much more expansive comparative analysis of

the efficacy and the cost of drugs and make that information public. I would like others to comment on that suggestion. It seems to

me that that has a lot of potential here. Anybody want to jump in?

Dr. Anderson?

Dr. ANDERSON. Yes. I think it is also a very good idea. I think

the Agency for Health Care Research and Quality already does

some of that now, and their expertise could be expanded as well.

It is quite difficult to do some of that, though, because, when you

are looking at a drug, you are generally looking at whether or not,

for a diabetes drug, it works just in diabetics. But most of the paVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
16

tients, especially Medicare beneficiaries, have diabetes and congestive heart failure, and several other chronic diseases as well.

Two-thirds of Medicare spending is by beneficiaries with five or

more chronic conditions. So the NIH would have to really change

how it is looking at effectiveness to incorporate all the people with

multiple chronic conditions in the study, and it is a very large expansion of their authority. I think it makes sense.

We have also dealt with this in the Medicare program a number

of years in trying to do cost-effectiveness to evaluate new technologies, and that has been exceedingly controversial.

The CHAIRMAN. Other comments on this one point? Mr.

Haislmaier?

Mr. HAISLMAIER. Let me just make one comment. I agree with

the other panelists on this. It is difficult to do that. It is controversial. The reason that it is controversial is because, as Dr. Anderson

noted, there are multiple variables involved.

The CHAIRMAN. Right. Right. Sure.

Mr. HAISLMAIER. So if you select out a few variables, you have

a problem.

The CHAIRMAN. But you have that problem in all studies.

Mr. HAISLMAIER. Well, yes, that is true. And maybe the way to

get around that, I would suggest—because private markets are

doing this now—might be to have multiple competing studies of

some kind so that you have a whole range of information out there.

Some of that could be funded out of the government, some of that

could be elsewhere, because private entities are already doing

some.

The CHAIRMAN. I would like to ask about making pricing more

transparent so that the organizations can do research and get on

all that. I understand that, currently, the Secretary does have pricing information with respect to what beneficiaries pay to their

pharmacies.

I also understand that the Secretary has available to him today

the discounts, the net, the transaction prices that manufacturers

pay to the plans. But I understand, further, that it tends to stop

there. It stops at the Secretary’s office.

My question is, would it be helpful if the Secretary analyzed the

information and whatnot, if that information would be made available to various organizations, maybe even to the public, I do not

know. But let us start with some organizations, CBO, whatever the

organizations might be, in a way that also protects the proprietary

interests that the companies have.

I further understand that currently that is not a problem with

respect to Medicaid. That is, that information goes to the States

under Medicaid and, I think, NLIS. I am not sure. But so far, as

far as I am aware, there have not been proprietary problems in

that area. I may be wrong as to exactly who has Medicaid pricing

information.

But Dr. Morton, you raised your hand. If you could just comment

on that, please.

Dr. MORTON. Certainly. Medicaid is not that great, actually. The

best price under Medicaid is secret, to the best of my knowledge.

So you can find out what the list price is, but——

The CHAIRMAN. A secret to?

17

Dr. MORTON. To researchers like me.

The CHAIRMAN. All right. You would like to have that.

Dr. MORTON. The prices paid by enrollees for their drugs are

public because they are on the website, the Medicare website.

The CHAIRMAN. Right.

Dr. MORTON. However, in order to get a data set of these prices,

it is really a hassle because you have to build a web crawler and

go and collect these things, which takes a really long time. So I

would advocate, given that they are public anyway, I do not see

any reason why they could not be available in a database or a

spreadsheet.

The CHAIRMAN. What about the other side of data?

Dr. MORTON. The other side, I would advocate not revealing. If

I get a terrific price out of a company for a drug and I am a PDP,

the last thing that company wants is any chance of that being

made public and everybody else asking for that great price, too.

Maybe for research, but it really would reduce the incentive of

firms to give those discounts.

The CHAIRMAN. My time has expired, so I am going to follow up

on this later.

Senator Grassley?

Senator GRASSLEY. Yes. Before my 5 minutes start, I am not

going to give an opening statement. I apologize for not being here

when you started. But I did want to compliment you, in your first

hearing as Chairman, for taking on a very aggressive health care

agenda. I look forward to working with you on that.

It is my understanding that SCHIP reauthorization is going to

be a major part, so we will work together on that. Thank you.

Now, in my 5 minutes—and I would hope maybe you could do

this in 2 minutes because I have a longer question for three of the

panelists—I have only two questions.

So, Dr. Morton, some people think that negotiating power comes

from having a large number of people that a purchaser would buy

for. Number one, is that really the case? Number two, is there a

point beyond which you really do not get greater purchasing power

as far as what people would call a bulk rate?

Three, does it matter much whether you negotiate for 1 million

people or 43 million people, as long as you use tools like formularies? What would be the case if there would be no formulary?

Dr. MORTON. So you have exactly identified the issue, that size,

of course, is important. If I try to negotiate with Pfizer, I am not

going to get very far as an individual. But we see quite small

HMOs, like the Yale Health Plan or Kaiser, getting very good

prices.

So, size quickly bottoms out, so to speak, as a way to negotiate.

So the formulary is the way you negotiate, and you get a better

price the better you can move market share.

So if you can promise the buyer that their cholesterol drug is

going to be 100 percent of your usage and you are going to have

zero market share of their competitors, that is what they want.

That is what is going to get you a low price.

Senator GRASSLEY. So 1 million people or 43 million people, it

does not make much difference.

18

I am going to start out with Mr. Dicken, but I wanted Mr.

Haislmaier and Dr. Morton to comment.

Mr. Dicken, the Government Accountability Office has done some

work on what would happen if Medicare got prices like those under

the Federal supply schedule and had a 24-percent discount set in

law.

In the GAO report of 2000, you concluded that mandating that

Federal prices for drugs be extended to such large groups as Medicare could lower their prices, but increase prices for others.

This is an important point for people to understand. For the benefit of people not familiar with the GAO work, could you expand

on the GAO’s conclusions? I would like Mr. Haislmaier and Dr.

Morton to comment.

Mr. DICKEN. Thank you, Senator Grassley. As you note, several

years ago, before the implementation of Medicare Part D, GAO

looked at some considerations if prices under various other approaches were expanded to larger populations such as Medicare.

Certainly, one of the considerations is the potential for increases

for some purchasers or decreases for other purchasers such as

Medicare.

One of the things that we highlight in the 2000 report, as noted,

is the experience when the Medicaid ‘‘Best Prices,’’ which have

been referred to, were implemented. Within 2 years, we noted in

our earlier work that the best prices for commercial payors, which

were the basis for that, had risen so that the rebates that were

available to Medicaid under the best prices were at that minimum

level. But there are a number of other factors.

There is some uncertainty as to what the effects would be for

specific drugs, but there are some considerations as to whether the

prices would change for some purchasers or others.

Senator GRASSLEY. Mr. Haislmaier?

Mr. HAISLMAIER. Thank you, sir. I think that Professor Morton

actually really touched on that point when she noted that, because

of Medicare’s size in this market, it becomes, de facto, the average

price. You really get into a mathematical question, and that is, everyone cannot get a below-average price. So what the effect will be

is to drive it to a single price, really, for all markets.

In fact, to be critical of the industry, I think if I were in their

shoes I would be looking at single pricing for all my markets right

now, because in the Internet age when people can do price comparisons, the idea that you can charge one customer one thing and another another, I just do not see it working as well as it used to.

So, I think that will be the effect. It will, yes, raise prices on the

outside, maybe, but in the end, as Dr. Morton points out, it drives

to a single price for everybody.

Senator GRASSLEY. For small business and for individuals? It

drives up the price for small business and individuals?

Dr. MORTON. It would drive up everybody else’s prices, yes. So

the 24-percent discount is off of something. What is it off of? Usually an average private price. As we move more and more people

into purchases being paid for in some way by the Federal Government, the private sector is shrinking.

So, those poor guys. If we have 50 percent of the market that has

to get a 24-percent discount, what happens to everybody else’s

19

prices? They are up here, right, in order that the bulk of the market gets the price that the industry wants. So that is just going to

raise prices for everybody else, so I think it is really a bad idea.

Senator GRASSLEY. Thank you, Mr. Chairman. Thank you.

The CHAIRMAN. Thank you, Senator Grassley.

Senator Bunning, you are next.

Senator BUNNING. Thank you, Mr. Chairman. I really appreciate

this hearing, because it is very important with where we are at

with Medicare Part D to have the distinguished panel that we have

in front of us.

I assume the goal of requiring HHS to negotiate for drugs is that

some think it will save money, obviously, therefore, for the government and the beneficiary.

However, CBO says that on several occasions, including yesterday, that removing the non-interference clause would have negligible effect on Federal spending because HHS would not be able

to negotiate any better than the drug plans. I would like someone—

whoever—to comment on this. Go right ahead.

Dr. ANDERSON. Thank you very much. I read the CBO report,

and I recognize that CBO is very data-driven. I agree with Senator

Baucus that CBO should get the information as to the prices that

the private sector is paying for drugs and comparing it to the prices

that the VA and other places are doing.

Senator BUNNING. Are you telling me that CBO is uninformed

about any prices?

Dr. ANDERSON. CBO and CRS do not know the prices that the

Part D plans are paying.

Senator BUNNING. They do not?

Dr. ANDERSON. They do not.

Senator BUNNING. Then how could they comment at all?

Dr. ANDERSON. Well, because we can estimate what the prices

are. But my opinion is that they should be given the information

as to what the Part D prices are.

Senator BUNNING. Is there anybody else on the panel that has

a different opinion? Go right ahead.

Dr. FRANK. I do not know if it is different.

Senator BUNNING. Variety.

Dr. FRANK. I think the issue here is, there is a tendency to rely

on theory here about how things ought to work, and I think there

is a lot of opinion here that is being driven by that. I think we need

to look at the data, so I agree with Dr. Anderson’s comment.

But at least on the Medicaid dual side, the evidence reported by

the pharmaceutical industry suggests that, in fact, the prices have

gone up for the same people for the same drugs, so we need to get

to the bottom of that because that may tell us——

Senator BUNNING. That is, on the average, for dual eligibles?

Dr. FRANK. That is for sets of drugs that are heavily used by

those people.

Senator BUNNING. But not for the recipient.

Dr. FRANK. Not for the recipient, for the government.

Senator BUNNING. Oh. All right.

Dr. FRANK. Right. And so the question here is, if that is the case,

what is it that is keeping us from using negotiating power to get

close to that price? So, really, it is a data question.

20

Senator BUNNING. All right.

Number two, not many of us in this room have participated in

drug pricing negotiations. How critical is it for the negotiators to

be able to walk away from the table, first of all? Do you think it

would be likely for Medicare to walk away from the table? If not,

then what would the outcome be? Dr. Morton?

Dr. MORTON. I do not think it is likely that Medicare would walk

away from the table unless we are ready to make a national formulary, which I think is probably inadvisable. If we are not going

to walk away from the table, then all you can do is jawbone: you

know, I would really like it if you could sell at lower prices. But

I do not put a lot of faith in that.

Senator BUNNING. Or else?

Dr. MORTON. Or else nothing.

Senator BUNNING. Or else nothing.

Mr. HAISLMAIER. Senator, I covered that in the beginning part of

my written testimony on the economics of negotiation. It is well understood in all areas of negotiation that what matters is not so

much size or anything else, it is, what is your alternative if negotiations fail, and how good is that? What is that best alternative

relative to negotiation?

Senator BUNNING. Well, if there is an alternative——

Mr. HAISLMAIER. That is the point. I think Dr. Morton and I

would agree that the only way—and this is why CBO is not scoring

it—is if the Secretary has another alternative and can walk away

from the table and say, that is not good enough, I am going to do

this instead.

Senator BUNNING. In other words, more information that CBO

and/or HHS might have as an alternative to the current formulary

or the drug that they are using?

Mr. HAISLMAIER. It is not so much more information, it is an alternative action. Each alternative action has a cost and benefit.

Senator BUNNING. All right.

Mr. HAISLMAIER. So the VA can say, look, you do not give me

what I want, your drug is not on the formulary and you can forget

it.

Senator BUNNING. We do not put it on.

Mr. HAISLMAIER. That is my alternative action.

Senator BUNNING. But then there has to be another drug that

can be used for the same effect.

Mr. HAISLMAIER. There does not have to be.

Senator BUNNING. Well, if we want to help the patient, there

does.

Mr. HAISLMAIER. Well, again, that then becomes a cost associated

with your other alternative that you have to take into consideration. Will this mean that patients will come banging on my door?

I mean, that is why Congress, for example—you cannot just hand

this off to HHS. This will come back to you. That is part of the cost.

So if the alternative is to say, well, you are not going to get the

drug, and then people come and say, well, wait a minute, I want

the drug, I am going to have it excluded, well, there goes the Secretary’s leverage.

Senator BUNNING. Thank you very much.

21

Mr. HAISLMAIER. In any negotiation, you have to have an alternative.

Senator BUNNING. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Dr. Anderson, as you heard earlier, I am for markets, I am for

Medicare being a smart shopper, and I am against price controls.

Now, particularly under the approach Senator Snowe and I are

talking about, simply saying in carefully described circumstances

when you have a monopoly drug, when you have a drug developed

with taxpayer money, would it not change the psychology of the

marketplace for folks to know that, in those kinds of instances

where there may not be some bargaining power, the Secretary

might step in?

Now, in doing that, we have stipulated that there cannot be, Dr.

Morton, any price setting. Nobody can say 73 cents a pill. Senator

Snowe and I specifically bar price controls or setting up a national

uniform formulary. But we do say that in certain limited instances,

that kind of bargaining power in those instances I described could

change the psychology of the marketplace.

What is your assessment of that?

Dr. ANDERSON. I do not think the Secretary can negotiate on

4,400 different drugs. I think the Secretary, however, can negotiate

on a limited number of drugs each and every year.

If he or she has the information saying, how much does the VA

pay for this, how much do other organizations pay for this, they

can go right to the top of the list and say, well, this one is 10 times

more than in the marketplace or that the VA is getting. Why is

that?

The Secretary has a lot of things that he or she does with the

industry besides just buying drugs in Medicare, and so does the

committee here have a lot of things that it deals with with the

pharmaceutical industry.

So when the Secretary or when the Chairman of the Senate Finance Committee calls and says, we have a problem with the price

for this drug, I think they are going to listen.

Senator WYDEN. I cited Cipro in my opening statement, and

Chairman Baucus did as well. So we can be clear on that, that was

a pretty stark example where the Secretary did not come in and

say, I am going to set up a national uniform formulary, I am going

to ravage the private markets. He basically just said, let us talk.

Is that not correct?

Dr. ANDERSON. That is what he did, and he paid half the price

that he originally had to pay, which I think is a pretty good deal.

That was something that was a monopoly.

Senator WYDEN. Mr. Chairman, because time is short, I would

like to also put into the record, today we took off the website a list

of drugs developed with a significant amount of taxpayer money.

It came from the National Institutes of Health. I am going to try

to get a quick question in for Dr. Anderson on that. Could we put

that in the record?

The CHAIRMAN. Without objection.

[The information appears in the appendix on p. 192.]

22

Senator WYDEN. Staying with, again, the example, Dr. Anderson,

of no price controls, but having the opportunity to talk and bargain,

does it not make sense to do that in an instance like Taxol, this

breakthrough drug that has brought billions of dollars in, and most

of the work was done in government laboratories?

I thought Dr. Frank made a good point with respect to, we want

to make sure we do not disincent the development of those drugs,

but again, why should the government, in something like that that

is so important to American women, not at least have the opportunity to talk?

Dr. ANDERSON. You just doubled the NIH budget over the last

number of years. One of the reasons why you doubled the NIH

budget was to get new research. One of the outcomes of new research is new drugs, so Taxol is a perfect example of the impact

of doubling the NIH budget and getting new drugs there.

So you, the Congress, have invested a lot of money in NIH and

drug development. I think one of the things that you should do is

get a return on your investment. One of the things is, you create

a monopoly, and now you have to make sure when Part D is negotiating in a monopoly, that it is able to pay a fair price.

Senator WYDEN. My time is up. I would just say to colleagues,

particularly to those on the other side of the aisle, Senator Snowe

and I voted for this program. I have the welts on my back to show

for it, as my friend from Oregon knows. We want to make it work.

We want to keep the basic infrastructure in place.

But we do think there is an opportunity to get a better value for

seniors and a better value for taxpayers by making sure that there

is some additional bargaining power, the kind of thing Dr. Anderson is talking about with respect to the marketplace that can make

a real difference. We are hoping that we can work with colleagues

on a bipartisan basis to do that, and look forward to our next

round, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman. Thank you.

Thank you to everyone. I have many more questions than 5 minutes will allow, so I will be quick.

First, to follow up on Senator Wyden’s comments in terms of the

public. Dr. Anderson, when you spoke about the public investment,

I think that is such an important point for us to look at. From the

Pharma website, they have indicated $39 billion in R&D in the last

year, $29 billion on the public side for NIH, plus the R&D tax credit, plus deductions, plus the patents, and so on.

So we, as taxpayers, have placed a major investment because it

is so important. R&D is critical. It is critical to lifesaving drugs, so

we have put a lot into that, and taxpayers have a real stake in that

and have supported the industry to be able to do that. I think that

is just important to say for the record.

In terms of pricing, we know that there was a report released

this week that found that the lowest Part D plan prices are, in fact,

significantly higher than the VA. And I am not suggesting we just

take the VA approach, but there is a huge variation.

The median difference between the lowest Part D plan and the

lowest VA price was 58 percent, and in some cases up to 1,000 perVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
23

cent. So I would just contend that there is a lot of room there to

negotiate in these prices.

But one area I wanted to specifically ask you about, it was interesting. Dr. Morton, you spoke about the fact that one area to save

money would be dual eligibles. I know, Mr. Haislmaier, you spoke

differently, but three panelists have spoken about dual eligibles.

Dr. Frank, you said the same thing, and Dr. Anderson.

We know from not only testimony today, but we have had a Wall

Street Journal story about the drug company profits under Part D.

We have a New York Times story about drug companies raising

prices on the top-selling drugs as Part D went into effect and there

has been a shift in the market. Now we see the concern about moving from Medicaid, where there was negotiation.

Our State has done a very, very good job on that, as well as

group purchasing with other States under Medicaid, to get very

good prices now to Medicare.

I guess I would start with Dr. Anderson, then if the others would

like to respond as well, about dual eligibles. It seems to me we

have a clear situation here now where States are negotiating and

Medicaid did one thing, and we now take up dual eligibles under

Medicare and have seen, in general, higher prices. I think Mr.

Haislmaier has a different testimony.

Dr. Anderson?

Dr. ANDERSON. Thank you very much. First of all, NIH is the

crown jewel of the world, and we really sponsor much of the research in the world, so we should then pay reasonable prices in the

world for drugs. Right now we are paying, generally, the highest

prices for drugs in the world, yet we sponsor most of the drug development.

In terms of comparison of Medicare and Medicaid prices, Medicaid prices are generally much lower than the best price that the

PDP plan has been able to obtain. As a result, the fact is that you,

as the Congress who pays for the dual eligibles, are the organization that is paying those higher prices than before.

I agree with Dr. Frank that, if you look at the 10Qs and 10Ks,

you see some evidence of that. But more importantly, if you look

at the numbers that the GAO has put out and the CBO has put

out comparing the best prices that the Medicaid program and the

best prices that the private sector gets, the private sector is not

getting as good a price for many drugs as Medicaid is getting.

Senator STABENOW. Dr. Frank, you spoke about that as well. I

am running out of time, and I would welcome everyone here to respond, but I did particularly want to hear from you about that.

Dr. FRANK. The question is, there are sort of two parts, I think,

to the question that underlies this. One is, are the Medicaid prices

for the drugs that we know about set at a reasonable level in terms

of, are they consistent with encouraging new investment and bringing on new drugs, particularly for things like anti-psychotic medications, which are very important to the dually eligible? And my

impression is that the answer to that is yes.

So then the question is, if, then, we are taking that price and

raising it above the level that is sufficient to bring in investment,

that is an indication that we may be paying too much and so that

is something to look at.

24

Senator STABENOW. Mr. Haislmaier, do you want to respond?

Mr. HAISLMAIER. Yes. Thank you for the opportunity to comment

on that. I was one of the people who argued—and in fact, practically up until yesterday, literally—that I thought dual eligibles

ought to be put back in Medicaid. I said that back in 2003, and I

have held to that. I have had to rethink my position, simply because I have looked at the data.

The data, as I presented, shows that the cost—remember, cost is

a function not only of price, but of a lot of other things, volume,

mix, et cetera. The cost is down, according to CBO and CMS, by

22 to 25, 26 percent. In fact, I just literally got additional data

after I had done this chart last night that shows it is even lower.

So the question in my mind is, well, why is Part D now spending,

in effect, less on the dual eligibles than Medicaid was? So I

thought, well, there are some explanations. One, it could be a difference in enrollment. But that does not seem to be the case, because we simply transferred everybody over. All right.

Maybe there is decreased access to drugs. But we know that is

not the case, because actually some of the Medicaid formularies

were pretty restrictive, and Part D is not. So maybe it is more cost

sharing by the beneficiaries. But we put in all these low-income

subsidies, we have a 100-percent premium subsidy, very little cost

sharing, no donut hole. So I am running out of explanations.

So what did I come up with? Well, I think, as I said, this really

has to be looked into more closely, but I think what is going on is,

under a price-mandated discount system, there is all sorts of gaming that goes on. In fact, some of that, I think, was reflected in the

Wall Street Journal article about a company that used to manage

these drugs.

The CHAIRMAN. Senator, your time has expired. Thank you.

Senator STABENOW. Thank you.

The CHAIRMAN. Thank you very much.

Mr. HAISLMAIER. So there are some other explanations.

The CHAIRMAN. Thank you.

Senator STABENOW. Thank you, Mr. Chairman.

Mr. HAISLMAIER. Thank you, Senator.

The CHAIRMAN. Thank you very much.

Senator Salazar?

Senator SALAZAR. Thank you very much, Senator Baucus, for

holding this very important hearing on a very important subject.

I approach this, first, as the most freshman member of this committee and not having been here when Medicare Part D was

passed. I think Medicare Part D is an important program and

something we need to support, and something where we need to

figure out ways of making it better.

But for me, the striking reality is, when you look at the prices

that VA and the Department of Defense are paying for drugs

versus what it is that we are paying under Medicare Part D, it is

incredible to me that we can say, well, I guess that is all right;

maybe because of the size or the bulk that we are purchasing here

for Medicare Part D, it is not going to make any difference.

So I guess my question to Dr. Anderson and to Dr. Frank—because it seemed to me that you were both advocating the repeal of

the non-interference clause in negotiation, perhaps, for certain

25

unique drugs—is whether we would see the same kinds of results

and savings that we have seen for the Department of Defense and

VA.

Somebody gave me a copy of the report that Families USA did,

where they actually came up with drugs that I think, for all of us

who have elderly parents in our families, know too well: Lipitor,

Plavix, and Zocor.

But you look at all those drugs and there is a 58-percent difference between what is being paid by DoD and the VA on the one

hand, and what we are paying here for Medicare Part D.

So my question to you, as advocates of doing something with this

non-interference position in Medicare Part D, is would we see these

same kinds of cost savings if we were to repeal the law or to

change it in some way?

Dr. ANDERSON. I am not sure that you would get exactly, nor

would you necessarily want to, the same prices that are gotten by

the VA or by DoD, but I think what you want to do is to look at

the prices that DoD and VA are getting and compare it to the best

price, the best price that the marketplace is able to get. Then that

informs this committee, it informs the Secretary as to how good a

deal is the private sector, in fact, receiving?

If we knew how good a deal the private sector was receiving compared to the best price that the VA is getting, then you would be

able to see whether a negotiation on a particular drug is necessary

or not. But without that information, we are all talking theory

here.

What we need is to have CBO and everybody have the information. Then I think the Secretary does have a lot of bargaining

power, because not only is the Secretary buying drugs, but he is

regulating drugs, he is doing a whole variety of other things.

So the bargaining power that the Secretary has, if the Secretary

chooses to use it—and I gather that Secretary Leavitt is not choosing to use it—they would have great bargaining power.

Senator SALAZAR. Let me ask you this question to push you a little bit more during my time. That is, so if you were to give that

kind of authority to the Secretary and the Secretary then were to

be able to make the comparison and find out that there is a 58-

percent difference or some other difference, would it not then be

appropriate for the Secretary to use the power vested in the Secretary that we would give the Secretary to go out and negotiate for

prices, for example, some of the drugs that are listed in this list

of 20 here?

Dr. ANDERSON. Yes. I think he or she would probably be negotiating on some of those. I would suggest you start at the top of the

list where the prices that the Part D plans are getting are the

worst and work your way down.

Senator SALAZAR. So you are saying, first we have the information, and if that information shows something, then the negotiation

could take place.

Dr. ANDERSON. Then allow them to negotiate. Right.

Senator SALAZAR. How about you, Dr. Frank? What do you think

about that conversation?

Dr. FRANK. As I said, I think on the unique drugs, I think there

currently are very few breaks on the prices there. People are wellVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
26

insured. The plans are well-subsidized and there is very little bargaining power. So I think that allowing for some negotiation there

is a reasonable thing, but certainly information first.

The second thing is, I just want to note that I do not think the

VA would be the benchmark that I would ever choose, and there

are a variety of reasons that we do not have time to get into.

The CHAIRMAN. Can you just tell us, in one sentence, why?

Dr. FRANK. Well, first of all, the way things are delivered, the

way things are assembled, purchased, and administered are so

completely different from the way they are in Medicare, that those

basic prices are just very hard to compare.

Then I have no belief, necessarily, that those are the ‘‘right’’

prices that are consistent with that balance between encouraging

new drugs and getting our budgets under control.

Dr. MORTON. Could I answer your question, just for 30 seconds?

Senator SALAZAR. You have 3 seconds.

Dr. MORTON. All right. If you cause the Secretary to look at VA

prices and make that the basis for negotiating Medicare prices, VA

prices will go up. I would imagine, tomorrow, VA prices will be

higher because of the focus in this hearing on them.

If you think about a tiny little buyer who is the government, you

give them a little break, fine. If it is everybody you are selling to

because it is Medicare, you cannot recoup that. You cannot fund

R&D out of those low prices, so you just will not give them.

Senator SALAZAR. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Roberts?

Senator ROBERTS. Thank you very much, Mr. Chairman. I want

to thank the panelists.

Mr. Chairman, I have a very brilliant, comprehensive, and pertinent statement that I would like to insert in the record at this

point.

The CHAIRMAN. We want to hear it. [Laughter.]

Senator ROBERTS. Well, my time is your time, sir. [Laughter.] I

do not have enough time to do that.

The CHAIRMAN. It will be included.

Senator ROBERTS. All right.

[The prepared statement of Senator Roberts appears in the appendix.]

Senator ROBERTS. I just want to go on on this VA business. I

think it has been pointed out that the VA drug program does restrict patient access to medicines and relies on a very limited number of VA pharmacies or mail order. That has been said before and

I am simply repeating it.

But it is estimated that the VA formulary or the drug list contains only 38 percent of the drugs approved in the 1990s and 19

percent of the drugs approved since 2000, and, in addition, nearly

80 percent of the prescriptions in the VA program are distributed

through the VA mail-order system.

That is not going to work in Dodge City, KS or Billings, MT. It

just is not going to work that way. I do not think any community

in America, or any senior citizen, would certainly welcome any limited access to their necessary medicines.

27

What I would like to basically ask, if I can get past this very brilliant statement, Dr. Morton, in your testimony you mention you

are concerned with Medicare getting in the business of reference

pricing because, as you have said before and now we have talked

about it a lot, Medicare is such a large purchaser, you mentioned

that such an approach to controlling prices harms other consumers

of pharmaceuticals in the U.S. by potentially leading to higher drug

prices in the private sector.

You suggest in your testimony that if the Secretary were to negotiate—and that is an interesting thing to me—I do not know how

the Secretary is going to negotiate, other than smothering people

with the milk of human kindness and then asking, ‘‘please.’’

I do not know what clubs the Secretary is going to use. I am used

to clubs in regards to the Secretary of HHS, more especially with

our hospitals and other health care concerns in the rural health

care delivery system, and I do not particularly want to go down

that road. But at any rate, he would have to rely on a national formulary to achieve the best bargaining leverage.

You then go on to state, this process of choosing which drugs

would be excluded from the national Medicare formulary would become dominated by stakeholders such as manufacturers and patient advocacy groups.

Well, 60 percent of the small businesses in Kansas do not have

any health care plan. In another committee, the Health Committee,

Senator Enzi has a small business health care plan, and we came

pretty close.

But one of the real concerns was that virtually every patient advocacy group—and I certainly do not blame them—said, hey, we

want to be part of a comprehensive plan. Whoops! The small business cannot afford it, so they said, we want a lower-cost plan, or

a bare-bones plan, or whatever you want to call it.

And so I just want to highlight this for my colleagues. I want to

raise an issue here that may be sort of a curve ball here, but as

a member of the Senate Ethics Committee, and as the Senate is

currently debating an ethics reform package which I considered an

oxymoron, but that is another whole subject, can we imagine opening up the Medicare prescription drug program to one dominated

by one who can hire the best lobbyists to get their drugs on the

formulary?

I think that that might happen, rather than the drug plan as it

currently works, which allows seniors access to the drugs they need

at whatever affordable cost they determine.

So would you elaborate on what you think such a process would

look like? Because if you are going to give a break to one group,

you are going to cost another group.

Dr. MORTON. So I think a national formulary is a poor idea.

What we have instead, which is plans which offer different kinds

of formularies, makes more sense. So if you are a senior who does

not mind being restricted to one cholesterol drug and not having

a choice between four of them, you sign up for a plan that is cheaper.

That plan can get you a cheaper drug and you can save money

by being willing to be restricted. If you do not like being restricted,

you have to pay more. That is, I think, a very nice way of allowing

28

formularies to exist and getting cost savings to people who want

cost savings, and allowing some choice for people who care about

that choice.

I think the negotiating, the ‘‘milk of human kindness’’ part, is exactly right. That is why I advocate having some kind of trigger that

sends drugs out for a cost effectiveness study. That is the hammer.

You say, look, we are really going to find out how good you are,

and if you are good we will pay you, but if you are not good we

are not going to.

Senator ROBERTS. Well, we will call that the Baucus plan. I have

yielded back two seconds.

The CHAIRMAN. Thank you, Senator. I am still waiting for that

statement, but we will get it. [Laughter.]

Senator Kyl?

Senator KYL. Thank you, Mr. Chairman.

First, I would like to ask some questions for the record, if that

would be agreeable, since I will not have time to be here for a second round. I am going to have to go to the floor.

Second, I would like unanimous consent to put in the record a

story appearing in the Washington Post this morning, and also an

editorial by Secretary Leavitt.

The CHAIRMAN. Without objection.

[The article and editorial appear in the appendix on p. 164.]

Senator KYL. Third, it seems to me we have learned some lessons

here. For example, when you supply over half of a product, it is

hard to beat the average price. We appreciate that basic lesson.

Also, one of my colleagues made a comment, my friend from Oregon, that we need to be smart shoppers. He talked about buying

toilet paper one roll at a time. Now, is this the way that PBMs—

and anybody can answer this—negotiate for drugs?

Dr. MORTON. No.

Senator KYL. All right. Thank you.

Now, this is one of the lessons that I get out of this, that while

there are a lot of different factors, a pretty basic bottom line here

is that the best price is usually based on a monopoly use.

In other words, when you sit down and negotiate, you either

have the carrot of saying to the person with the company you are

negotiating, we will give you the monopoly use if you will give us

a really good price, and the stick of saying, and if you do not, assuming there is a competitor, we are going to go to your competitor

and he is going to get exclusive use. We agree on that. All right.

Would the record note nodding of heads in the affirmative.

Dr. ANDERSON. Let me interrupt for a moment.

Senator KYL. Sure. Dr. Anderson?

Dr. ANDERSON. As long as there is, in fact, a drug that is a competitor.

Senator KYL. Yes, indeed. Of course, that gets to the question of,

if you only have one choice, you are going to be effective in negotiating, assuming people want that choice and you want to be able

to provide it to them. So, thanks for that.

So it seems to me then, with this factor really being a key driver

of negotiating power, that one of the things we could expect is, if

this were the model, that patient choice would be dramatically reVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
29

duced and in some cases would be eliminated altogether. Is that

also a general proposition that you can derive from this?

All right. Again, nodding of heads.

Now, it seems to me, therefore, that there are two models. There

is a government model——

Dr. FRANK. I do not think we were nodding as enthusiastically

as you think. [Laughter.]

Dr. MORTON. Usually there is a medical exclusion.

Senator KYL. All right.

Dr. MORTON. So there is one cholesterol drug, but if I am allergic

to it, I get to use another.

Senator KYL. Please understand, in, now, 31⁄2 minutes, I am trying to speak in relatively broad terms here.

But we have two models here, and this is what I am getting at.

We had a choice when we developed the Medicare Part D. We could

go with the government-dominated model or we could try a model

that uses a bunch of competitors, these pharmacy benefit managers, all of whom have incentives to beat each other to get to the

lowest price.

Yet, the end result is this, it seems to me. Correct me if I am

wrong. If you have the one government situation, you have made

a decision for everybody: this is the drug you will use, and we have

gotten you a good price because we excluded all of the others.

But if you have the pharmacy benefit manager concept with a variety of companies being supplied the drugs in a market which offers lots of different plans—companies for some drugs but not for

others, and other companies having negotiated the lower price for

other drugs, and they put all of these into insurance packages and

offered them on the market with the result that the purchasers get

the benefit of both lower price and choice as a general proposition.

Would anybody like to comment on that? Dr. Morton?

Dr. MORTON. Yes. So for these drugs with substitutes, that is exactly right. We have to be careful not to make the error of looking

at the prices in a plan that has negotiated hard for Drug A, looking

at their prices for Drugs B, C, and D that are substitutes, because

those will be very high. So, that is exactly right.

The problem is, there are six protected classes in which plans are

not allowed to do these kind of aggressive cost comparisons, and

there they have much less negotiating leverage. I believe that to

be a significant problem, because that is where all the duals are.

Those classes are where all the medications are that the really sick

people take.

Senator KYL. And I take your point that that is one of the areas

we might want to look at. For political reasons—I should not say

political—there was a real choice to make, whether we have a separate Medicare program with the dual eligibles or back to Medicaid.

We made a choice, and we understood there were benefits and

problems with that choice. But that is something that probably

does bear looking at again.

I guess my time is up. But if Dr. Frank would like to comment,

is that all right?

The CHAIRMAN. Yes, but very briefly, if he wishes to.

30

Dr. FRANK. I just want to offer a friendly amendment to Dr.

Morton’s comment, which is, I think there are good reasons why we

have protected classes, because a market does not always work.

It is well known that if we were to unprotect, say, the anti-psychotic drugs, the last thing you want to be is a good anti-psychotic

drug bargainer, because all the people with schizophrenia and multiple complicated illnesses will flock to your plan and you will lose

money.

Senator KYL. And, Mr. Chairman, everybody will flock to us if we

start to undo that kind of thing, which is the other problem of having to make these limiting choices. Thank you all very much. A

very, very good panel.

The CHAIRMAN. Thank you. Thank you, Senator, very much.

Senator Snowe, you are next.

Senator SNOWE. Thank you, Mr. Chairman. I thank you for holding this hearing at the outset of your chairmanship, because it is

a crucial issue.

Senator Wyden has indicated we have introduced legislation once

again this week. I think this debate, not just here but throughout

the country and in Congress, about the question, well, it has to be

an all-or-nothing proposition, that in order to have price negotiations on the part of the Secretary, it either requires a restricted formulary or price setting.

That is why Senator Wyden and I were very careful to draw and

craft a middle ground in which we do prohibit price setting and restricted formularies. What we are attempting to do is to get at

some of the issues in the course of implementation. It does not

have to be an all-or-nothing proposition.

First and foremost, if you look at the overall industry—and I

know, Dr. Morton, you were referring to that about the R&D and

having an impact on research and development—it is interesting to

note that the industry, when you compare it to other industries

such as computer software and cell phones, they have invested 14

percent of their revenues in R&D.

Their products have declined and there has been very competitive pricing. Now you look at the largest 12 pharmaceutical companies. They invest 14.7 percent, and their products are increasing at

2 and 3 times the rate of inflation.

So there is an issue at hand here. We are not seeking an approach that is going to impact research and development. I would

suggest that it is not. In fact, they are benefitting from very high

profitability—in fact, 3 times higher—than most industries in

America when it comes to profits.

The GAO issued a disturbing report in November, stating that

from 1993 to 2004, despite inflation-adjusted increase in investment of 147 percent, the number of new drug applications rose only

38 percent, and it was not because of a lack of capital. So I think

that it is important to keep that in perspective as we examine the

issue.

Then you get to the Part D implementation. What are we concerned about? It has not been fully implemented yet. We have not

gone through a full year of implementation to see the true cost.

That is a concern. Not all low-income seniors are on the program,

for a variety of reasons.

31

We are seeing premiums going up at least 10 percent. Donut hole

coverage is diminishing, and that is going up. In fact, Maine is one

of three States that does not have donut-hole comprehensive coverage; now that is up to 11 States. Out-of-pocket costs have increased.

So then you think about the fact that drug prices are going up

2 and 3 times the rate of inflation. CBO projected that the cost of

the Part D would be 8.7 percent back in 2003, and we are now up

to 10 percent increases in the premiums, and so on. So, we are

looking at all of that.

So what can government do to get a better price, to be a smart

shopper, as Senator Wyden said? So that is why we delineated certain criteria and conditions under which the Secretary can use the

power of the podium and that leverage.

I mean, there will be instances where, frankly, the plans might

need the assistance of the Secretary in order for the pharmaceuticals to negotiate in good faith. So we are not just talking about

restricted formularies. In fact, we are not talking about it at all.

What we are talking about here is being able to seek discounts.

That is not unusual in business today. In fact, my staff did comparison shopping of retail drug pricing in Maine of the 24 drugs

most used by seniors in this plan for 2 weeks, all throughout

Maine. They compared CVS, Rite Aid, Hannaford, Miller Drugs,

Wal-Mart, everybody. It was interesting. On average, they had an

11.9-percent advantage. Now, seniors are facing a $38 monthly premium, so obviously

their premiums are going up. But if you use Costco or drugstore.com, you can get almost the same discount, comparatively

speaking. They do not use a restricted formulary.

So I would like to have Dr. Anderson speak to this question, Dr.

Frank, and any of the panelists on this question. Is there not a way

in which the Secretary can play a pivotal role, whether it is the

power of the podium and leveraging in certain instances and that

it does not require an all-or-nothing, you have to set prices or have

restricted formularies, when, in fact, Costco and drugstore.com do

not use a restricted formulary to achieve discounts? Why should it

be any different for a public program such as Part D that is one

of the single largest social programs we have in America?

Dr. ANDERSON. What I think you do is, you allow the marketplace to work when the marketplace is working. Probably most of

the drugs, the marketplace is working just fine. I think you step

in when the marketplace is not working when, because of patents,

because of a variety of factors, the marketplace is not working and

we need to jump in. I think your bill does exactly that.

Senator SNOWE. Dr. Frank?

Dr. FRANK. I agree. I think that targeting the trouble spots,

using information, putting it on the table, shining a light on it, the

government has lots of influence, lots of tools and has a lot of interaction with the industry, so I believe that there is some negotiating

power there. It does not have to be all or nothing. In fact, I would

agree with you that it should not be sort of relying on national

formularies in order to accomplish these ends.

Senator SNOWE. Thank you.

Thank you, Mr. Chairman.

32

The CHAIRMAN. Thank you, Senator.

Senator Hatch is not here. Senator Cantwell?

Senator CANTWELL. Thank you, Mr. Chairman.

If I could just ask each of the panelists a question, if you could

just give me a simple ‘‘yes’’ or ‘‘no’’ answer, that would be very

helpful. I know that not everybody here is an economist, but do you

believe that functioning markets require transparency?

Dr. MORTON. If the market is already functioning?

Senator CANTWELL. No, just in general. In general, for a market

to be functioning, does it need a certain amount of transparency,

yes or no?

Dr. MORTON. Yes. But——

Senator CANTWELL. We will get back.

Dr. Frank, yes or no?

Dr. FRANK. Yes. But——

Mr. HAISLMAIER. Yes. But——

Dr. ANDERSON. Yes.

Senator CANTWELL. Thank you.

Mr. DICKEN. Price transparency is important for lots of different——

Senator CANTWELL. Can you just answer ‘‘yes’’ or ‘‘no?’’

Mr. DICKEN. Yes.

Senator CANTWELL. Yes. All right. Great. So everybody is ‘‘yes’’,

with a few ‘‘yes, buts.’’

Do we have enough transparency in this drug market for the

government, yes or no? Then we can get into the whole discussion

about the buts, ands, or ifs. Is there enough transparency now for

this to function?

Dr. MORTON. Not on the effectiveness side.

Senator CANTWELL. Dr. Frank, yes or no?

Dr. FRANK. Probably not.

Mr. HAISLMAIER. Yes.

Dr. ANDERSON. No.

Mr. DICKEN. I cannot comment on that.

Senator CANTWELL. You cannot respond to that? You do not have

an opinion or you do not have enough information to know?

Mr. DICKEN. We would have to give more thought to that and

would be glad to follow up with you.

Senator CANTWELL. I think that is really what everybody is saying. At least that is my opinion, I think people said it best. We had

the debate. There was one proposal that was under Medicare. It

lost. Now we are saying we have a market. But do we really have

a market if we do not have transparency?

Having chased the dysfunctional western energy crisis electricity

market where there was not transparency, we saw how wrong markets could go. So the question seems to me, what level of data are

we comfortable in having access to so that we know we have a

functioning market?

So, Mr. Dicken—and I want people to have a chance—but I do

not know that you looked at PBMs specifically on their data. Is

that true? Did the GAO look at the effectiveness of PBMs?

Mr. DICKEN. Not in the Part D market. In the past we have

looked at PBMs in the Federal Employees Health Benefit Program

and looking at the role that they have played, both in negotiating

33

discounts, rebates, and other cost-containment tools, as well as the

money that they have retained through some of their cost-containment negotiation efforts.

Senator CANTWELL. Because in 2003, the State of Maine passed

a law that required companies doing business in the State to disclose their financial agreements with drug manufacturers.

So, under the law, PBMs do not have to make information on

payments public, but they must disclose this information. They do

not make it public; they disclose it to their clients. So this was

upheld in the U.S. Appeals Court, and the Supreme Court has said

it is not going to make a decision on it. So we at least have some

States doing this reach to try to get the transparency that will

make these markets function.

Dr. Morton?

Dr. MORTON. I do not think you need to know the cost of your

automobile maker’s—I do not need to know Ford’s costs when I buy

an automobile, and that is because I can compare a Ford car to a

Chevrolet car, to a Toyota.

Senator CANTWELL. Right. Your web crawler analogy.

Dr. MORTON. If I am an employer in the State of Maine and

there are a bunch of PBMs there, I do not care what they are paying for drugs. I care how much they are going to charge me for an

equivalent benefit.

And how they choose to reduce their own costs is, I would argue,

their problem. So I think we should strive for that goal here. That

is to say, make sure consumers are presented with effective competition across plans. Plans are going to try hard. It is in their best

interests to lower their acquisition costs, so we need to give them

the tools to do that and make sure that consumers can choose between plans and understand the differences across them.

Senator CANTWELL. And the transparency.

Dr. Anderson, did you want to respond?

Dr. ANDERSON. I think it is important to know the prices that the

drug companies are charging the different PDPs and other Part D

plans so that we can compare the prices. So let the marketplace

work, and when the marketplace fails, we should know it and we

should intervene.

Mr. HAISLMAIER. Senator, I concur with Dr. Morton. To follow up

on that analogy, it is not essential for the market to function for

me to know what GM paid its supplier for a carburetor versus

what Toyota paid its supplier for a carburetor. I am comparing the

cars and I am comparing the prices.

So the answer is, from the perspective of the beneficiary and

from the perspective of you as Federal lawmakers with oversight

over this program, you have the single most important piece of

data that matters. You know the ultimate outcome of all the numerous variables, and that is reflected in the premiums paid and

the subsidies going out.

That, ultimately, is what matters. The test is, what does the program cost today? How could you make it cost something less?

Would you, in fact, make it cost something less?

Senator CANTWELL. I would just point out that three of the panelists—one did not want to give an answer—said that we do need

more information. What we are protecting ourselves from is manipVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
34

ulation. What we are protecting ourselves from is for when markets

do not function. That is why transparency is key.

So I think, actually, there is a lot of commonality for the need

for more transparency. So I hope, Mr. Chairman, we can take this

up and look more into what transparency of detail we really need

to make sure we have a functioning market.

The CHAIRMAN. I appreciate that. Thank you, Senator.

Senator Rockefeller and I both have to leave very quickly. Go

ahead, Senator Rockefeller.

Senator ROCKEFELLER. Mr. Chairman, you and I have to be at

a Children’s Health Care Radio forum, live, in 5 minutes. I will go

ahead and do this very quickly, then I want to submit. I will just

ask one question; I have lots, particularly on VA. There are a lot

of misconceptions, I think, out there in VA.

This is to you, Dr. Morton and Mr. Dicken. Dr. Morton, you said

in your statement something which was quite extraordinary, I

thought: ‘‘One way to reduce a plan’s desire to manipulate its formulary to avoid bad risk is to move many of the bad risks out of

Medicare Part D. This could be accomplished by shifting dual eligible patients back into Medicaid. While pricing in Medicaid is not

a simple problem either, at least these patients would not exert a

negative externality on the rest of Part D recipients.’’

Dr. MORTON. What does that mean?

Senator ROCKEFELLER. No, I know what it means. It is just

slightly condescending. It is condescending. I will make my point.

A couple of points to make. When we made Medicare a universal

benefit, that is something that a lot of us gave blood for. We gave

blood for it during the whole prescription drug benefit. I strongly

believe that low-income seniors and disabled individuals are

human beings, that they should not be excluded from Medicare

benefits because of their income levels, which is what I think you

are suggesting. Dual eligibles should not be treated as second-class

citizens, which I think you are suggesting.

Dr. MORTON. No.

Senator ROCKEFELLER. Let me finish. I think you should know

I feel very strongly on that, because when you make what I would

call academic statements about dual eligibles being ‘‘bad risks’’ and

‘‘exerting negative externality,’’ which is almost like an odor or

something of that sort, and I am serious about that—I mean, this

is the way policy gets made and the way it gets translated to the

American people, and it creates perceptions which are not good.

One can easily get the impression that you are saying that lowincome seniors should be excluded because they are poor. I come

from a State called West Virginia where we have people with all

kinds of incomes, but I just want you to know, I have a real problem with that.

Second, your argument about duals creating adverse risk in the

Medicare drug benefit seems to me to be factually incorrect. I

would also like to have Mr. Dicken comment on this when I have

made my point.

It is my understanding that the prescription drug benefit plans

get risk-adjusted payments. Plans get risk-adjusted payments for

every Medicare recipient. Plans also get an add-on payment for

dual eligibles, which is a very generous one. Plus, there are reinVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
35

surance payments for anyone who goes through the donut hole, including dual eligibles.

In addition, plans do not have to spend marketing resources to

find and enroll duals. Instead, plans have revenues from day one—

it is a guarantee—because duals are automatically enrolled in the

drug benefit, for better or for worse.

So the bottom line, to me, is that plans receive significant subsidies to cover dual eligibles. We did that. I think this is counter

to what you have indicated.

So I think, in that sense, that you are targeting the wrong population. Are the high-risk beneficiaries not really those who do not

have Medicaid, have high prescription drug costs, and who will fall

into the donut hole? I would ask if you two would respond to that.

Dr. MORTON. So, certainly I had no intention of suggesting that

anybody who is low income should not be entitled to a prescription

drug plan. Quite the contrary. I think it is very important that

they are included.

What I meant by a ‘‘negative externality’’ was that we have designed these protected classes without as much formulary management in them. The reason for that is, if I can manage my formulary

so that I do not have any good anti-psychotic drugs, I can drive

those people—exactly the ones you just identified who are sick and

expensive because they do not perhaps have the extra subsidy—

away from my plan. So that is what we have done to try to stop

that.

My suggestion of moving these sick patients back into Medicaid

just reduces the number of people in the category that the plan is

trying to manipulate. If you reduce their financial incentive for manipulation, they have less reason to do it. That was the basis of my

thinking.

Senator ROCKEFELLER. All right.

Dr. MORTON. But I understand they also get very good coverage

in Medicaid. If that is not correct, then that would be an issue.

Senator ROCKEFELLER. Mr. Dicken?

Mr. DICKEN. Certainly, Senator Rockefeller.

The CHAIRMAN. You are going to have to be very brief here.

Mr. DICKEN. This is very, very important. So just three very brief

things. Indeed, there are risk adjustments that are paid to make

sure that CMS is paying the actual amount that the individuals

would have paid for cost sharing if they were not dual eligibles.

Let me say just that there are a number of ways of looking at

those that are going to be a high cost. Some of those high-cost individuals will also be those who are not dual eligibles, those that end

up going through the donut hole and then being picked up again

by CMS.

The CHAIRMAN. I appreciate that. I am going to have to leave

here. Senator Grassley has very kindly agreed to chair the rest of

this hearing.

I want to thank the panelists. You all have been just terrific, all

five of you. I think it has been a very constructive hearing. I, for

my part, first believe that we should strike the non-interference

language.

Next, I plan to develop a proposal, in conjunction with all the

members of this committee, to address the basic question we are

36

all trying to address to help make the market work better, perhaps

intervene or just deal with those issues where there is a monopolistic position, or we are talking about the special drugs, or the

dual eligibles, or whatnot.

I also believe that we have to give NIH a lot more authority to

do a lot more comparative analysis of drugs. Further—and I am

not able to follow up on this yet—I do believe that the pricing information that the drug companies currently give to NIH should, in

a way that protects proprietary interests, be made available to research organizations so that we can get a better idea of what is and

is not going on.

But I want to thank the panelists very, very much. I appreciate

it.

Senator ROCKEFELLER. Mr. Chairman, can I just ask that my

statement be included in the record? Also, that I be allowed to

write individual members the questions that I had for them? We

just both have to go. Thank you.

The CHAIRMAN. Thank you.

[The prepared statement of Senator Rockefeller appears in the

appendix.]

[The questions appear in the appendix.]

Senator GRASSLEY. The next person is Senator Lincoln. I am

going to stay for a second round because I have some more questions to ask, so be appreciative of everybody’s time because it is

getting close to the lunch hour.

Senator LINCOLN. Thank you, Mr. Chairman. Thank you so much

for bringing us together on this very important issue.

I have several questions. Mr. Haislmaier, you, and I think it was

someone else—maybe it was Dr. Morton—mentioned that the dual

eligible costs had gone down under Part D from what they were in

Medicaid. You mentioned that earlier, that you changed your mind

about moving. Maybe Dr. Morton did not.

But, anyway, my question is, do you think that there is enough

data to believe those numbers? We just started this program last

year, and I have to tell you, I have a huge number of dual eligibles

in Arkansas, and the pharmacist was paying for the first month or

two of their prescription drugs because the transition was botched

big-time.

Mr. HAISLMAIER. I agree, Senator. In fact, sort of apropos to Senator Rockefeller’s comments, my previous advocacy of retaining the

dual eligibles in Medicaid was largely for those administrative reasons, if nothing else. I mean, there are some considerations about

risks and stuff like that. But, yes, it was because it would be an

administrative problem, and frankly I was surprised to find it.

Senator LINCOLN. But obviously it was important enough that

you changed your mind and your opinion on it.

Mr. HAISLMAIER. Well, I looked at this. It started with, there was

data that came out of CMS, so I started calling around. Then I

went back and looked at the CBO baselines and said, well, it is not

just CMS, it is CBO that is revising their baselines downward.

They are revising them downward. This is 20-plus percent that

they are revising them downward.

So I went back and I looked at the law and I said, well, what

did the law say for the estimating? The law said, well, if you go

37

back, you would start with the historic experience and these payments that the States would have to make, and it would be based

on their 2003 experience. They did some updates for 2004 and

2005.

Then from 2006 on, the law specifies that it is based on the rate

of per capita average annual Medicare. It is the same indexing as

the deductible in the plan.

So I keep coming back to the fact that apparently the data is

coming in that——

Senator LINCOLN. But do you think there is enough data to make

that decision? Obviously you have to base your decision on it.

Mr. HAISLMAIER. We are now into the first quarter of the new

fiscal year. I mean, I am kind of the wrong person to ask, and that

is why I am being a little hesitant here, because I am not in the

middle of CMS with all the data.

Senator LINCOLN. All right. Well, I will move on to my next question.

Mr. HAISLMAIER. But so far, it looks good to me.

Senator LINCOLN. I just noticed an enormous gap in our dual eligibles when we went into this program. It did not have to happen.

It should not have happened because there should have been greater oversight from CMS in how they made that transition.

But I think Dr. Morton makes a good point, particularly about

the anti-psychotic drugs and mental illness. We, for some reason,

never really bring that issue up around here. It is a huge issue out

there for Americans. Without that prescription drug coverage, it becomes a huge issue for taxpayers, so I think that is important.

Dr. Morton, you also mentioned ‘‘triggering’’ a couple of times.

Your triggering, mostly, was referenced to studies or investigation,

research, perhaps. Maybe you could elaborate on that, or maybe

there are some views we might discuss in having the secretarial

negotiations triggered by Medicare drug prices increasing above a

specified level of some sort. We have talked about triggers in a lot

of things up here in the last several years.

Dr. MORTON. I am just responding to the general sense I get

from people in the field that there are many drug categories and

individuals that we seem to be doing just fine on and getting good

prices on, and I do not then see a need to have the Secretary intervene in such a market.

So I am trying to think, what would be the sort of a trigger that

would be appropriate in addressing the needs that we have without

being unnecessarily burdensome. So, in particular, the protected

classes strike me as the place to focus attention because the plans

are not as able to create competition in those fields. So if they cannot create competition, we cannot rely on the market to solve our

problems in those particular classes.

Then I would just say, it is sensible not to spend a lot of effort

trying to reduce prices on drugs that we do not spend very much

money on.

Senator LINCOLN. Right.

Dr. MORTON. I mean, it is the big drugs in those classes that are

the problem, I think.

Senator LINCOLN. Yes. Right. Go to the problem spots. Exactly.

38

One of the concerns of allowing, obviously, the government to negotiate drug prices, as we talked a lot about, is diminishing pharmaceuticals research and development activities. I do not know. We

have talked about all kinds of studies.

GAO did have a study that found that, over the last decade, the

increase in research and development expenditures, as reported by

the pharmaceutical industry, has not been matched by the growth

in the number of new drug applications.

So I think that as we talk about that, what evidence is there that

R&D would diminish substantially if Federal negotiations were included, or if in fact we put a trigger in to negotiate drugs, because

quite frankly, between research—and we have talked very little

about patents and generics, the availability of generics, or how successful pharmaceutical manufacturers have been in developing

breakthrough drugs.

I mean, we have a lot of ‘‘me, too’’ drugs out there. The vast majority of the new drugs are simply formulations of what is existing

as opposed to what we really think research and development

should be going to, and that is the newer breakthrough drugs.

So any comments you all might have about research versus patents and generics, and where is the carrot, where is the stick, and

what do we do with that?

Dr. MORTON. I mean, I think that that is one reason not to interfere much with the breakthrough drug prices. If those are expensive, I do not know. My gut feeling is that that is the place, if any

place, that we want to reward research and development, a breakthrough drug that does something new that we never could do before that is really helping us out.

Senator LINCOLN. But if it is a monopoly drug that has had a

patent for 17 years——

Senator GRASSLEY. Let them answer your question because your

time is up.

Dr. MORTON. But then a ‘‘me, too’’ usually comes along pretty

soon.

Senator GRASSLEY. Go ahead and answer the question, and then

we will go on.

Mr. HAISLMAIER. Can I make a comment, Senator Grassley, in

response to that? This is a little different topic, but it is an important one. There seems to be in pharmaceutical R&D—and I have

talked to various experts in the field and nobody really has a handle on why—a sort of general, 15- to 20-year cycle where some leap

forward in technology—whether it was computers back in the

1970s that allowed for them to screen more, and now I think the

new cusp is genetic information—produces a curve of increasing

breakthroughs and developments, and then that curve tapers off.

We are sort of, right now, in a trough, I think, in this cycle. The

last time was in the late 1980s. Then we had, in the early 1990s,

a whole slew of new drugs. All the statin drugs for treating cholesterol, for example, came onto the market then. There were the antidepressants and things like that. So you have this sort of curve,

and nobody is sure exactly why.

The point that I would make about the leverage on single-source

drugs, is this. If the manufacturer of the single-source drug—there

is no competitor to it—is a large manufacturer with other drugs,

39

then both the private players and the government have some other

leverage because they have other products.

If you are looking at a sole-source drug where there is one small

manufacturer and that is the only thing they have, small biotechs,

then it is a very different equation. As to the evidence, it is that

last group that is virtually non-existent in Europe because of these

policies.

I mean, the only biotech industry, really, in Europe, is in the

U.K. In fact, this is an issue the Europeans are looking at, as they

have, in effect, discouraged that kind of small biotech development.

Senator LINCOLN. Dr. Anderson?

Dr. ANDERSON. Yes. I still want to make sure that the American

senior is not the only one in the world that is supporting R&D.

Senator LINCOLN. Exactly. Thank you.

Mr. HAISLMAIER. I would agree on that.

Senator LINCOLN. Dr. Frank?

Dr. FRANK. Just two points. I think the question we are trying

to get at is, you want enough money on the table to have an incentive for these people to keep going there. But when people are fully

insured and heavily subsidized, you do not want the sky to be the

limit, and you have to try to find that place. That is why negotiation may make sense on the unique drugs.

Let me just try to clarify, I think, what may be a misconception.

I do not think that it is an easy sell to say that European biotech

is not there because of rules in Europe, because if they are selling

half their products to the United States with U.S. prices then they

have all the incentive in the world to invest, even if they are in

Bordeaux.

Senator LINCOLN. Thank you.

Senator GRASSLEY. I would like, before I ask a couple of questions, to call your attention to the fact of something that we were

able to just now hand out. It follows on, yesterday, OMB saying

that in the House bill, H.R. 4, that there would be no effect on lowering drug prices if that bill were to pass.

We have CMS, today, and the Office of Actuary putting out the

same information: ‘‘Although the bill would require the Secretary

to negotiate with drug manufacturers regarding drug prices, the inability to drive market share via the establishment of a formulary

or development of a preferred tier significantly undermines the effectiveness of the negotiation.’’

I am going to start my first questioning with Dr. Morton. It is

a follow-up of the questioning of Senator Cantwell.

Are there any potential pitfalls we should know about, for example, if all best prices had to be made public? I want to give a little

background before you do that so I can quantify, because there is

a quantifiable part of this road that Senator Cantwell was going

down. She had an amendment last year to make best prices required, and CBO scored it at $40 billion. So, now, the question.

Dr. MORTON. So if you make manufacturers sell to Medicare at

their best price, which is their lowest price, they will not give a low

price to anybody else in the economy because half of their business

is being sold at that price.

So the VA’s prices would go up, Department of Defense’s prices

would go up, Kaiser’s prices would go up. Anybody who is getting

40

anything that is below average would come straight up to the average.

Senator GRASSLEY. All right.

Dr. Anderson, the Congressional Budget Office, yesterday, released that letter I referred to. I am not going to quote again from

it, but they also emphasized the lack of leverage to obtain significant discounts because of not having a formulary.

So my question is this. How do you believe the government

would have the leverage to lower prices if, as in the House bill,

there is no ability for the government to set up a formulary that

enables it to shift beneficiaries to lower-cost drugs?

Are all the professional economists at CBO and the professional

actuaries, and most of the other economic and health policy experts

just wrong in saying that their universal experience has been that

you need a formulary to move market share?

Dr. ANDERSON. Well, let me answer two questions. First of all,

I think that is is important to have the data to know whether or

not the marketplace is, in fact, working.

So right now, CBO does not have the requisite information to

know whether or not the prices that the best Part D plan is paying

are any better or worse than what the Medicaid program, the VA,

or Canada is getting. I think they should know that before they answer the question.

The second thing, I think, is if Secretary Leavitt is not willing

to negotiate prices, then I would totally agree with the CBO that

the Secretary is not going to have any negotiating power. But I

think a Secretary who has a lot of dealings with the pharmaceutical industry, besides the Medicare program, would be listened

to.

I think if this committee were to have the people that were in

charge of the pharmaceutical industry come here and try to explain

their drug prices and why they are charging the Medicare beneficiary more than the VA—more than the other places—and put

them on the spot, I think you would get lower prices right away.

They would not even want to come here.

Senator GRASSLEY. Another question to you. As you are aware,

the non-interference clause also prohibits the government from establishing a price list that prohibits the Secretary from imposing

price controls on drugs purchased by Medicare. So are you saying

that the Secretary should have the authority to impose price controls instead of negotiating?

Dr. ANDERSON. No. I think it is totally in negotiation. I think you

get the information as to what the price is that the Medicare program is paying and compare it to VA, compare it to Canada, compare it to Medicaid, see where the prices are substantially higher,

and that is where the negotiation begins. I would not do it on all

of them. I would not have a price list. I would have a negotiation.

Senator GRASSLEY. Dr. Morton, would you comment in reaction

to what he said?

Dr. MORTON. I think if you do not have anything to threaten the

manufacturer with, you are not going to get anywhere with a negotiation. It seems that what Dr. Anderson has in mind for the threat

is generally worse regulation going forward: next time you come to

me to ask for something, I am going to be upset with you because

41

your price is not low enough on Drug X, and that is going to be

the reason that you get a low price on Drug X.

Certainly that might well be true, but I do not know that it is

a sustainable way to do policy. It would depend on how good a negotiator the Secretary was, and it would depend on how and whether the Secretary could affect other parts of the government to make

the climate adverse for manufacturers.

Senator GRASSLEY. I want to get my last question in before the

5 minutes are up.

Dr. Anderson, foreign governments have attempted for some time

to control access to different types of drugs. I have examples from

three countries, but I am only going to use Australia at this point

to speed things up. In Australia, as a matter of government policy,

a woman has to break a bone before she can get medicines to treat

osteoporosis.

If the Secretary is required to negotiate but cannot use a formulary as leverage, would you say that these policies of government-run health care systems are the kind of policies that the Secretary could use to negotiate lower drug prices in Medicare?

Dr. ANDERSON. I think the Secretary should have that available

to him, but I would not do that as my first or second choice. But

I think the Secretary should be aware of what other countries are

doing because we are in an international market.

Senator GRASSLEY. Senator Wyden?

Senator WYDEN. Mr. Chairman, thank you. You and I started

punching and counter-punching this morning at 7:30, and you are

such a good friend, I just want to make sure a couple of points are

clear on the record.

Senator GRASSLEY. Just understand, we were smiling all the

time. [Laughter.]

Senator WYDEN. Every time. Every time. Your friendship, as you

know, with our victory this week to end secret holds, is something

that is very important to me.

Just so the record is clear, what Senator Snowe and I are proposing is quite different than what the House of Representatives is

looking at in H.R. 4. So that it is clear for the record, we are talking about making Medicare a smarter shopper, number one. We

have a strict statutory prohibition on setting up a national uniform

formulary.

We have statutory language barring price controls, and we try to

address—as virtually all of you have been interested in today—this

issue of getting more information, more transparency so that people are in a position to make markets work. So, I want to be clear

about the differences between what Senator Snowe and I are proposing and H.R. 4.

I also want to come back, so that the record is clear, to this example of Cipro, because I have heard throughout this morning all

kinds of threats and the like.

Respectfully, Dr. Morton, to review the situation, there was a

simple negotiation. It was not some trumped-up kind of exercise

where people were hauled into the back and beaten with a club.

The Secretary said, we are going to have to talk. We have a problem here. It does not seem to me the marketplace is working particularly well, and we have to have a negotiation.

42

So I hope, particularly as we wrap this up—and I anticipate that

this will go on for some time longer—that we can understand that

a number of us, on a bipartisan basis, believe that there is a clear

and sharp line between Medicare shopping smart and Medicare

crossing the line into price controls and having a national uniform

formulary.

We are very grateful to you, Dr. Anderson, for making it clear

today on the record that you support the approach that we are

talking about, because I think it goes right to the point you started

out with 3 hours ago: this is about the psychology of markets.

Those of us who voted for this legislation, Senator Snowe and I

specifically, want to make markets work. We know that this program is helping a lot of people who have very big bills, thousands

and thousands of dollars’ worth of bills, and very low incomes. Nobody wants to tear that up.

The question is, can you shop smarter? That is why we have described three or four instances in our legislation where we want to

make the program a smarter shopper. You can be sure that Senator Snowe and I and the others who have supported this are going

to be anxious to have the input and counsel from all of you so that

we can make sure that that line remains very bright between shopping smart, which we favor, and price controls and uniform

formularies, which we oppose.

So, Mr. Chairman, you have been very gracious. You and I are

going to be on the same side more often than not, and I look forward to continuing this discussion with you and our colleagues.

Senator GRASSLEY. Thank you very much.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. I appreciate the opportunity to just follow up with one question, I believe.

I echo the words of my colleague from Oregon. There are those

of us who voted for this believing that not only was it an important

advancement and modernization to Medicare, but also recognizing

some points that you all have brought out.

That is, with the correct application of prescription drugs for,

particularly, the Medicare population in this country, there are

other health savings down the road, whether it is hospitalization,

whether it is nursing homes, whether it is long-term care and a

host of other things. But the appropriate application of getting

medications to the Medicare population makes a huge difference in

the overall cost of our health care system.

I think we have to look at that bigger question as we look

through solving the problems of making the Medicare Part D the

best possible program it can possibly be, and certainly that is my

objective.

The one thing I would like to finish with is that I hope and encourage us all to not underestimate the role of the pharmacist in

this. To echo the words of Senator Roberts, I grew up in a very

small town in the Mississippi delta of Arkansas.

My grandmother lived with us. At 82, she did not want to talk

to the doctor, she wanted to talk to the pharmacist. She knew what

her chronic diseases and her ailments were. She wanted to know

how to manage them better. She did not want to disturb the doctor,

43

she wanted to talk to the pharmacist who could deal with her on

that level. I think it is important.

When we talk about negotiations here, we are talking in this

huge, bulk, broad arena of CMS and pharmaceutical companies

and millions of people. We have to remember that it has to be administered.

I know that some of the complications we went through, some of

which still exist, in the implementation of the first year were that

pharmacists were getting one price or they were purchasing prescription drugs at one price, and within a week the pharmaceuticals were changing that price, so that when they got reimbursed they got reimbursed at a much lower rate. We cannot allow

that to happen, because if we do we will eliminate the kind of quality care that people in rural areas need and deserve.

So I just hope that we will certainly look at that issue in terms

of reimbursement. Also, when we talk about negotiating, that negotiations mean that you have to have a fair playing field.

If, in fact, formularies or providers can change the access, which

they have done—I cannot tell you the number of calls that have

come into my office where someone signs up for a plan and, 3

months later, access to the prescription drugs that were on that

plan is now gone and they have changed what they have access to.

So it has to be a fair playing field when we talk about those that

are going to be negotiating and those that need the resources for

research and development and whatever to provide these drugs,

that they are going to be fair to those whom we are providing it

to in terms of their access, and at least continued access.

They are only allowed to change during the open period. If the

formularies and the drug providers are allowed to change at any

time, then you have a disadvantaged circumstance for those beneficiaries.

Anybody who has comments there, I would appreciate those.

Dr. MORTON. We are trying to get data now to look at that, because I think there is a significant incentive now for a bit of a baitand-switch. So I am going to post some prices and some formularies in November, enroll people, and then as of March I can

change those in any way I please. I do not know if that is a problem, but potentially it could be.

Senator LINCOLN. But we do not hear from you until November?

Today is January.

Dr. MORTON. My colleague, Mark Duggan, and I are working on

this, so hopefully sooner.

Mr. HAISLMAIER. Senator, this is analogous to other work that I

am doing in insurance markets. Yes, you need to have a set of predictable and fair rules that applies to everybody. If the beneficiary

only gets to change once a year, then the update should only be

once a year. That is right.

That is how you would do it with the other provisions in a health

benefit plan like FEHBP. They get a shot at redoing their benefit

package before the open season, but once it is in they do not

change it midstream. That is a fair point, and there ought to be

a consistent set of rules for everybody.

Senator LINCOLN. Yes. Anybody else? [No response.] Thank you,

Mr. Chairman.

44

Senator GRASSLEY. Could I have a dialogue with you before you

go on a couple of points, Senator Lincoln? First, the point that you

just made about a plan dropping a drug sometime after you have

joined the plan and started taking it. If you are taking that drug,

they are required to let you keep taking it until the end of the year

when you have a chance to change to plans that would have it. So

if they cut you off in June, take it through until the end of the

year, whenever the year ends for that plan.

Senator LINCOLN. The patient has to petition for that, do they

not, for the additional coverage? I do not know. I just know that

I have a lot of patients who have run into that problem.

Again, Mr. Chairman, for seniors, requiring additional paperwork and additional petition just becomes one more issue that our

elderly are dealing with. You may be correct that there is nothing

that is required, but my indication was that they were.

Senator GRASSLEY. I want to give you what I tried to do for my

constituents in Iowa.

Senator LINCOLN. Good.

Senator GRASSLEY. If what you say is happening and it is not

supposed to happen, let us know so we can get on the plans about

that, please. We need to know these ad hoc, where things are being

done differently in different States than what the law intended.

The second point for you, before I get to Senator Wyden, is that

your concern about community pharmacists is entirely legitimate.

We took great care in the compromise to work to preserve community pharmacists, and it is not quite working out the way we intended. We have taken several steps in the last 12 months to take

care of some of these problems. They are not all taken care of yet.

So, I do not find any fault with that.

But the point I wanted to have dialogue with you on was this.

I do not know whether you are one of these that says we need to

do it because the Veterans Administration does it.

Senator LINCOLN. No.

Senator GRASSLEY. But just for those who do—it does not apply

to you then—do not forget that the Veterans Administration does

not have community pharmacists.

Senator LINCOLN. Yes.

Senator GRASSLEY. And remember that 80 percent of it is mailorder. So if you do something like the Veterans Administration

does, you are not going to have any community pharmacists in

rural, or even urban, Arkansas, rural or urban Iowa, if that is the

case.

Senator LINCOLN. Yes, sir. I understand that.

Senator GRASSLEY. And there is something about the Community

Pharmacists Association, whoever represents them here in town,

whoever their elected leaderships are, they are not speaking out

against people who say we ought to use the Veterans Administration as an example.

If we did it that way, they would not have any membership. I

think somebody in the Community Pharmacists Association ought

to be studying what these opponents of this are all about, and come

forth.

If there is any pressure on the other side, through the Democratic party, to have them keep their mouth shut and you are doing

45

it through the leadership, let me assure you that that leadership

is dancing to the wrong tune for the good of their members.

Senator LINCOLN. Well, Mr. Chairman, that goes a lot further

than anything I had intended, I will be honest with you. [Laughter.] All I know is, my local pharmacist—can I comment?

Senator GRASSLEY. Yes, you can comment.

Senator WYDEN. I would like to on that point as well, if I could,

Mr. Chairman.

Senator GRASSLEY. Yes. Then I have something I wanted to tell

you about your bill. [Laughter.]

Senator WYDEN. Just, again, so we are clear. Last year when

Senator Snowe and I got 54 votes in the U.S. Senate, we did not

go with the kind of approach that you have described that involves

a pharmacy approach that could be inconvenient to seniors.

We said, once again, we want to make sure that they are smart

shopping and there are not price controls, uniform formularies, nor

the kind of cumbersome operations which you have correctly described. So we steered clear of that approach last time, we are

steering clear with the legislation that we proposed yesterday. I am

happy to take a question. I know Senator Schumer has been patient for a long time, too.

Senator LINCOLN. Can I just make a compliment to you?

Senator GRASSLEY. Yes. Go ahead. [Laughter.] I will even listen

to your insults.

Senator LINCOLN. I just brought that up because my local pharmacists are very important to me. It is critical in implementation.

But the meetings that you had last year, Mr. Chairman, were very

useful when we sat down with CMS and the Social Security folks

and talked about what the problems were that we were seeing.

So, we know that there will be difficulties and challenges in implementing all these things. The kind of dialogue that you facilitated last year was tremendously helpful in us going back to CMS.

The problem is, if we cannot avoid any of those problems to begin

with, the lag time that it takes for CMS to address them just

seems to be pretty lengthy, and I hate to see our constituency go

through those problems unnecessarily. So there was tremendous

help that we had when you approached those issues and concerns

we had in our States last year.

Senator GRASSLEY. For Senator Wyden, I am just going to make

a statement. I was going to ask a question of Dr. Morton on this.

Just so you know, I have a concern about something that is in your

bill.

This may not be a consequence, but I would see a possibility of

this being a consequence, where you are going to let a plan ask the

Secretary to negotiate, if that plans wants the Secretary to negotiate instead of their negotiating. Now, we have maybe 44 plans in

Iowa, 42 or 44.

Would it not be the weak plans, the ones that are not very

strong, if they cannot negotiate anyway, do we want them in this

business? Do we not want them to get out of there? I mean, for instance, your party has said more than my party, that we have too

many plans already.

46

So are you going to let the Secretary prop up a weak plan by letting the Secretary negotiate them when they cannot negotiate—let

us say, what is it, Humana or one of the other big ones?

Senator WYDEN. Mr. Chairman, first of all, Senator Snowe and

I do not anticipate a plan asking very often for the Secretary to

step in and provide this additional opportunity. That is why, in effect, it comes after the single source drugs and it comes after the

taxpayer funded drugs and the like.

We just wanted to make sure it was something of a fall-back position. Perhaps you could have a plan that really did not have

much bargaining power, and it was in a rural area, say Oregon,

Iowa, or somewhere else, and you said, gosh, I want to make sure

that those people might—again, as we relate to the psychology of

markets Dr. Anderson is talking about—have some influence.

So, Mr. Chairman, so we are clear on this point——

Senator GRASSLEY. Well, then would you not want to make it——

Senator WYDEN. Can I just finish my sentence?

Senator GRASSLEY. Yes.

Senator WYDEN. Thank you. We do not anticipate it happening

very often, but in some instances, particularly in rural areas where

you might not have any coverage for folks, we think it might be appropriate, again, to bring in the Secretary. But we certainly do not

want to have it go on in hundreds of instances across the country,

and I think it is very unlikely that it would.

Senator GRASSLEY. Would you not want to change it to ‘‘may’’ instead of ‘‘shall’’ then?

Senator WYDEN. Well, if the Chairman tends to change his position and not filibuster Snowe-Wyden, we are open to that, yes.

Senator GRASSLEY. I am not bargaining here.

Senator WYDEN. All right. Thank you, Mr. Chairman.

Senator GRASSLEY. Senator Schumer?

Senator SCHUMER. Well, thank you, Mr. Chairman. I apologize to

all the witnesses for being late.

I have two points I want to make, because many of them have

been made. I know we have talked a lot about the potential of a

formulary or not a formulary. Look, it is pretty obvious, even

though you could probably bring prices down without it, you get a

lot lower prices if you have a formulary.

When you go to the maker of Lipitor and say, I am going to buy

10 billion Zocor unless I get a good price, that is a lot better than

saying, let us just negotiate Lipitor versus no Lipitor.

So I think a formulary, the way the VA has it, should be worked

into a bill. You have to have an easy appeals process. I mean, I

went through this. I take Lipitor. My medical plan switched us

over to Zocor. It is actually my wife’s plan. New York City’s plan

is better than the Federal Government, so I am on New York City’s

plan. She works for the city.

We did a test to see if Zocor worked, and it did. So now I am

on Zocor and I am saving somebody a whole lot of money, and that

is fine with me. But if Zocor did not work, I would have gone back

to Lipitor.

But I think we should seriously explore putting a formulary in

there, provided there is a very easy appeals process. That will save

47

us the most money, and I hope we can consider that when the time

comes.

The point I want to make, though, is about biologic drugs, which

I think you mentioned, Dr. Morton. Biologic drugs are a large part

of the Nation’s drug spending. They are costing tens of billions of

dollars, and they are growing. They are the latest and the greatest

in terms of, if you need one you can have one.

But there is no mechanism for generic versions of these drugs

that could bring down the prices and provide the same kind of savings we have seen in traditional generic areas.

The PCMA, the association of the pharmacy benefit managers,

came out with a study this month demonstrating that Medicare

Part D could save billions of dollars if there were generic alternatives to biologic drugs on the market.

Now, I am a sponsor here in the Senate—generic drugs have

been an issue that I have cared about for a long time—with Henry

Waxman in the House, of the Access to Lifesaving Medicine Act.

Today, by the way, there was an article in the New York Times

just about insulin which talked about this, but you could do it in

a lot more places than insulin, although insulin is very important,

maybe the leading one.

Our bill would create a pathway to generic versions of biologic

drugs. We are going to reintroduce it shortly. It has the potential,

as I said, for savings in this country.

So I would like to ask the panel just one quick question, leading

with Dr. Morton. Do you agree with the PCMA that if we had generic biologics we would save a whole lot of money in the Medicare

program? Do you see any good reason why we should not move to

generic biologics?

Dr. MORTON. Generics have been absolutely huge in the American health care story. We do generics better than most other countries, and they are very inexpensive here. I think we absolutely

have to have them for biologics, because otherwise intellectual

property is a joke. I mean, you get your patent and it lasts forever,

and that is not really the contract we have with innovators in this

country. So, I think it is extremely important.

Senator SCHUMER. Anyone else want to comment on that? Dr.

Frank?

Dr. FRANK. Yes. I want to agree. I think that the biologics need

to be looked at. I think there are some technical problems, but I

think most of them are probably reasonable candidates. I think

that there is more work to be done on regular generics as well.

Senator SCHUMER. Oh, indeed.

Mr. HAISLMAIER. Senator, yes, I would like to comment. Two

points. One is, one of the effects we have seen in other countries,

not in the biologics but in the chemical entities, is because of price

caps on on-patent drugs, what happens is, when patented drugs go

off-patent, the generic manufacturer has an incentive to shadow

price. So as a result, that huge gap that we have in this country

between on-patent and off-patent prices does not occur, and therefore no other country in the world has the level of generic drug use

that we have.

Actually, if I could make three points. Before Zocor went off patent, Lipitor was still more expensive than Zocor. But one of the inVerDate 11-MAY-2000 15:41 Feb 01, 2008 Jkt 095484 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 39938.000 SFIN1 PsN: SFIN1
48

teresting things about the pricing is Lipitor, from the very beginning, as a unit price, lowered cholesterol for a smaller dose of the

drug better than Zocor and Mevacor. So, even though the price per

tablet was higher, the bang for the buck was greater. From the

very day that they launched Lipitor, that is what drove its market

ascendancy, is that there was a bang-for-buck calculus.

The third point on the generics——

Senator SCHUMER. And by the way, just to interrupt, briefly, if

we were to have a system with a formulary, you would have to take

all those things into account. You could not do one size fits all; because one pill is 20 percent cheaper than another pill, you just go

ahead and use it.

Mr. HAISLMAIER. And this is why the idea of multiple competing

formularies—which is what the PDP plans are doing today—has

some merit, in my view, over a national formulary.

But to answer your question about the generic biologics, I have

not seen the PCMA study, but let me say this. I would caution anyone about thinking that, even with a generic biologic law, that the

savings will be anywhere near as great as with chemical entities.

The reason for that is this. As we saw with the flu vaccine, these

are living organisms.

Even with the same manufacturer from batch to batch, you have

a whole set of issues. Consequently, the disparity between the price

of sale and the unit price of production is not as great.

The unit price of production for biologics of any kind is much

higher than for chemical entities. So even with a generic biologic

law—and this is a very rough, off-the-back-of-the-envelope calculation—20 percent savings, 30 percent savings, not the 80, 90 percent

savings.

Senator SCHUMER. No. But you would not disagree that it is in

the billions, and probably the tens of billions of dollars.

Mr. HAISLMAIER. Yes. I mean, I have not analyzed the numbers.

Certainly, I think this is a huge issue that faces all payors in the

market going forward. The other issue that will face us is—the flip

side of genomics—we will get better at personalized medicine.

Senator SCHUMER. Right.

Mr. HAISLMAIER. Now, that means that the old economic model

for the pharmaceutical industry, if you get a big blockbuster like

Lipitor out there and sell it to everybody and make billions and

that covers all the other stuff, that economic model is going away

because you can better target, with genetic testing, which drug

works for which person.

But on the flip side, now, with a biologic like Herceptin, if the

woman with breast cancer has this profile, Herceptin works, if she

does not, you do something else. It becomes very difficult to deal

with the fact that if you want that drug, especially if it is a biologic, there is no way to really bring the price down. It is going to

cost you.

Senator SCHUMER. Yes. Fair enough.

Mr. HAISLMAIER. It is a tough world we are in.

Senator SCHUMER. It is a different system.

Dr. ANDERSON. May I just respond?

Senator GRASSLEY. Yes.

49

Dr. ANDERSON. I agree with you on the generic biologics. I am

a little concerned about your formulary proposal. That is, essentially what you would have, if you had 50 percent or 40 percent of

the drugs, you would essentially eliminate them from all the Part

D plans having that option. I think the Part D plans ought to have

the option of choosing whatever drug——

Senator SCHUMER. But is there not a way to have them have the

option, and at the same time create the greater competition by allowing people who can use either drug to go to one or the other?

Dr. ANDERSON. That would be, for me, quite a difficult set of activities, but I would have to take a look.

Senator SCHUMER. Do you think the VA has done a good job that

way?

Dr. ANDERSON. I think the VA has done an excellent job in terms

of that. But they are not, then, running a whole set of PDPs underneath them.

Senator SCHUMER. I see. All right. Well, I would be interested in

following up with you. Because certainly you want to preserve

choice for people who need it.

Dr. ANDERSON. Right.

Senator GRASSLEY. Senator Schumer, I would hope that, in your

question about the VA doing a good job, and if these answers are

dependent upon how you might see the VA as something, I hope

you would take into consideration that the VA only has 30 percent

of the drugs available to veterans that we make available to others.

You surely do not want to do something to cut our senior citizens

out of that 70 percent of the drugs that they now get, that, if we

had a VA program, they would not get.

Thank you all very much. For the chairman and myself, we appreciate it. This is very helpful to us in not only our review of the

whole program, as many things have been discussed here, but an

immediate piece of legislation that is going to be up in this area.

Thank you all very much. The hearing is adjourned.

[Whereupon, at 12:33 p.m., the hearing was concluded.]

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