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H.R. 4489, THE FEHBP PRESCRIPTION DRUG INTEGRITY, TRANSPARENCY, AND COST SAVINGS

ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

ON

H.R. 4489

TO AMEND CHAPTER 89 OF TITLE 5, UNITED STATES CODE, TO ENSURE PROGRAM INTEGRITY, TRANSPARENCY, AND COST SAVINGS IN

THE PRICING AND CONTRACTING OF PRESCRIPTION DRUG BENEFITS

UNDER THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

FEBRUARY 23, 2010

Serial No. 111–72

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

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

JUDY CHU, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

BLAINE LUETKEMEYER, Missouri

ANH ‘‘JOSEPH’’ CAO, Louisiana

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

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

COLUMBIA

STEPHEN F. LYNCH, Massachusetts, Chairman

ELEANOR HOLMES NORTON, District of

Columbia

DANNY K. DAVIS, Illinois

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

WM. LACY CLAY, Missouri

GERALD E. CONNOLLY, Virginia

JASON CHAFFETZ, Utah

MARK E. SOUDER, Indiana

BRIAN P. BILBRAY, California

ANH ‘‘JOSPEH’’ CAO, Louisiana

WILLIAM MILES, Staff Director

(III)

C O N T E N T S

Page

Hearing held on February 23, 2010 ....................................................................... 1

Text of H.R. 4489 ..................................................................................................... 26

Statement of:

Adcock, Daniel, legislative director, National Active and Retired Federal

Employees; Jacqueline Simon, Public Policy Director, American Federation of Government Employees; Colleen Kelley, national president, National Treasury Employees Union; John Calfee, resident scholar, American Enterprise Institute; and ..................................................................... 108

Adcock, Daniel ........................................................................................... 108

Calfee, John ............................................................................................... 139

Kelley, Colleen ........................................................................................... 126

McNeely, Larry, II ..................................................................................... 150

Simon, Jacqueline ..................................................................................... 117

O’Brien, John, Senior Advisor to the Director, U.S. Office of Personnel

Management; Patrick McFarland, Inspector General, U.S. Office of Personnel Management; Sharon Treat, esq., State Representative from

Maine and Executive Director, National Legislative Association on Prescription Drug Prices; Jasmin Weaver, healthcare initiatives legislative

director, Change to Win; Jonathan Boehm, president and chief executive officer, Argus Health Systems Inc.; and Richard Beck, Texas Pharmacy Business Council ................................................................................. 53

Beck, Richard ............................................................................................. 91

Boehm, Jonathan ....................................................................................... 83

McFarland, Patrick ................................................................................... 58

O’Brien, John ............................................................................................. 53

Treat, Sharon ............................................................................................. 65

Weaver, Jasmin ......................................................................................... 75

Weiner, Hon. Anthony, a Representative in Congress from the State

of New York ................................................................................................... 44

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

Adcock, Daniel, legislative director, National Active and Retired Federal

Employees, prepared statement of .............................................................. 110

Beck, Richard, Texas Pharmacy Business Council, prepared statement

of ..................................................................................................................... 93

Boehm, Jonathan, president and chief executive officer, Argus Health

Systems Inc., prepared statement of ........................................................... 85

Calfee, John, resident scholar, American Enterprise Institute, prepared

statement of ................................................................................................... 141

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

of Virginia, prepared statement of .............................................................. 51

Kelley, Colleen, national president, National Treasury Employees Union,

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

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

of Massachusetts, prepared statement of ................................................... 4

McFarland, Patrick, Inspector General, U.S. Office of Personnel Management, prepared statement of ........................................................................ 60

McNeely, Larry, II, health care advocate, U.S. PIRG, prepared statement

of ..................................................................................................................... 152

O’Brien, John, Senior Advisor to the Director, U.S. Office of Personnel

Management, prepared statement of .......................................................... 55

Simon, Jacqueline, Public Policy Director, American Federation of Government Employees, prepared statement of ............................................... 119

Towns, Hon. Edolphus Towns, a Representative in Congress from the

State of New York, prepared statement of ................................................. 173

Page

IV

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

Treat, Sharon, esq., State Representative from Maine and Executive Director, National Legislative Association on Prescription Drug Prices,

prepared statement of ................................................................................... 67

Weaver, Jasmin, healthcare initiatives legislative director, Change to

Win, prepared statement of ......................................................................... 77

Weiner, Hon. Anthony, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 46

(1)

H.R. 4489, THE FEHBP PRESCRIPTION DRUG

INTEGRITY, TRANSPARENCY, AND COST

SAVINGS ACT

TUESDAY, FEBRUARY 23, 2010

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL

SERVICE, AND THE DISTRICT OF COLUMBIA,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m. in room

2154, Rayburn House Office Building, Hon. Stephen F. Lynch

(chairman of the subcommittee) presiding.

Present: Representatives Lynch, Towns, Cummings, Clay,

Connolly, Norton, Issa, Bilbray, Chaffetz, and Cao.

Also present: Representative Driehaus.

Staff present: William Miles, staff director; Aisha Elkheshin,

clerk/legislative assistant; Jill Crissman, professional staff; Jill

Henderson, detailee; Dan Zeidman, deputy clerk/legislative assistant; Adam Fromm, minority chief clerk and Member liaison; Howard Denis, minority senior counsel; Ashley Callen, minority counsel; and Molly Boyl, minority professional staff member.

Mr. LYNCH. Good afternoon. The Subcommittee on Federal Workforce, Postal Service, and the District of Columbia will now come

to order. I want to welcome Ranking Member Chaffetz, members

of the subcommittee hearing, witnesses, and all those in attendance.

The purpose of today’s hearing is to examine H.R. 4489, the Federal Employees Health Benefits Program Prescription Drug Integrity, Transparency, and Cost Savings Act. The Chair, ranking

member, and subcommittee members will each have 5 minutes to

make opening statements, and all statements will be open for 3

days to submit amendments for the record.

Before proceeding, I would like to ask unanimous consent that

Representative Steve Driehaus be allowed to join us to ask questions and to offer testimony and appear before the subcommittee

here today.

Hearing no objections, that is so ordered.

I would also like to ask unanimous consent that the testimonies

of Mr. David Balto, navitist, the Coalition of Government Procurement, and the Pharmaceutical Care Management Association be

submitted for the record.

Again, hearing no objection, so ordered.

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Good afternoon everyone. Today the subcommittee convenes to

examine H.R. 4489, the Federal Employees Health Benefits Program Prescription Drug Integrity, Transparency, and Cost Savings

Act. Simply put, the reason I introduced this legislation was to

lower the cost of prescription drugs in the Federal Employees

Health Benefits Program [FEHBP]. I will try to avoid that acronym

as much as possible.

In these economically challenging times it is unacceptable to ask

Federal employees and the American taxpayer to put up with some

of the irregularities that exist in the pricing and contractual arrangement of the Federal Employees Health Benefits Plan, which

accounts for nearly 30 percent of the Federal Government’s total

spend on the Federal Employees Health Benefits Program.

If the Federal Employees Health Benefits Program wants to remain a model for providing health benefits, then legislative

changes that allow for alternative prescription drug benefit contracting and pricing are needed.

H.R. 4489 is the byproduct of nearly a year’s worth of work and

research. As many of you will recall, the subcommittee conducted

an oversight hearing on this very issue back in June. Moreover,

last fall we held a public policy forum with key stakeholders and

public agencies to further analyze various approaches to fixing

what I would describe as an opaque and flawed health benefit plan

design.

What we have discovered is that our Federal employees and retirees are not receiving nearly the best benefit at the best price as

it relates to prescription drugs. In fact, when comparing Federal

Employees Health Benefits Program drug prices to that of other

Federal programs such as the Department of Veterans Affairs, the

Department of Defense, Medicare, Medicaid, and the Public Health

Service 340-B program, the Federal Employees Health Benefits

Program is paying substantially more for its drugs. That is despite

having 8 million paying members.

Even more alarming is that a recent study on the cost of generic

drugs performed by one of our witnesses here today, Change to

Win, shows that having no drug coverage beats having coverage

under the Federal Employees Health Benefits Program. How can

people state that Federal employees have the best health insurance

in the country when people with no insurance are paying less for

their prescription drugs?

I am also baffled by the fact that even within the program we

see larger plans charging far more for prescription drugs in comparison to smaller plans, despite having a sizable difference in the

number of enrollees. Does the market-based concept of leverage not

apply to Federal Employees Health Benefits Program?

The legislation that my colleagues, Mr. Connolly and Mr.

Cummings, and I introduced is intended to not only lower costs of

prescription drugs in the Federal Employees Health Benefits Program, but to also provide our Federal employees with a safer, highquality prescription drug benefit by affording the Office of Personnel Management greater oversight authority in the contracting and

pricing of the Federal Employees Health Benefits Program, prescription drug benefits specifically.

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Prohibiting certain ownership relationships, requiring pharmacy

benefit managers to return 99 percent of all the moneys received

from manufacturers for Federal Employees Health Benefits Program business, capping prices paid by the health plan to the average manufactured price [AMP], restricting drug switching by pharmacy benefit managers and requiring enhanced transparency and

disclosure of all contract terms and related information.

In this day and age, when every effort is being made to reduce

Federal spending and to find money to fund health care reform and

other domestic policy priorities, the level of ambiguity around costs

and drug prices under the Federal Employees Health Benefits Program is appalling, and this must change.

As chairman of this subcommittee, I am committed to providing

the best benefits to our Federal employees to the best price, and

whether that is accomplished by the provisions contained in H.R.

4489 or by agency regulation and contractual changes like those

issued by the Office of Personnel Management yesterday in the

Carrier Call letter makes no difference to me. Let the end justify

the means, as long as we aren’t simply maintaining the status quo.

I would like to thank today’s witnesses for sharing their

thoughts, insights, and expertise on this complex issue. I understand that several of you have come quite a way to be here with

us today, and I deeply appreciate your willingness in helping the

subcommittee determine how best to improve the Federal Employees Health Benefits Program prescription drug benefit for both the

Federal employee and the American taxpayer.

Again, I thank you for your participation and I look forward to

hearing from today’s witnesses.

[The prepared statement of Hon. Stephen F. Lynch and the text

of H.R. 4489 follow:]

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Mr. LYNCH. I would like to yield now to the ranking member, Mr.

Chaffetz from Utah, for 5 minutes for an opening statement.

Mr. CHAFFETZ. Thank you, Mr. Chairman. I simply want to

thank you for holding this hearing. I want to thank our witnesses

for coming and their expertise in sharing candidly their thoughts

and perspectives. I, too, want to save money for Federal workers

and, importantly, most importantly, the taxpayers’ money, and

hopefully we can achieve that.

Again I thank you for being here.

I yield back the balance of my time.

Mr. LYNCH. It is the custom of this subcommittee to swear witnesses. We are graced with the presence of Congressman Anthony

Weiner. Mr. Weiner has represented New York’s ninth Congressional District in the U.S. House of Representatives since 1999. He

is currently a member of the Committee on the Judiciary and the

Committee on Energy and Commerce, where he serves as the vice

chair of the Subcommittee on Communications, Technology, and

the Internet. Before entering Congress, Representative Weiner

served in the New York City Council.

I am going to ask my friend to please rise and raise your right

hand.

[Witness sworn.]

Mr. LYNCH. Let the record show that the witness has answered

in the affirmative.

My friend, Mr. Weiner, you now have 5 minutes for an opening

statement.

STATEMENT OF HON. ANTHONY WEINER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEW YORK

Mr. WEINER. Thank you very much. I have prepared testimony,

but with your indulgence I would just like to submit that for the

record and just make a few remarks.

Mr. LYNCH. Without objection.

Mr. WEINER. It is important that we understand that PBMs do

an important thing. They are a valuable tool. The way they work

is that a big employer who has an insurance company might not

want to be in the benefits management business and pharmaceuticals might not know the ins and outs, so they hire a PBM to

take that market pool that they have that gives them some clout

in the marketplace and have someone manage that clout.

The only question here is: who should benefit from that? Should

it be the person that hires the PBM, whether it be a labor union,

whether it be an employer, or whether it be in this case the Federal Government? Or should it be the PBM, itself? That is the only

question.

The problem that we have is for us to figure out who should derive those benefits, we need to know what benefits there are. We

don’t have that knowledge right now. For example, if the employees

of the Federal Government hire a PBM to go negotiate the best

price for Lipitor, we don’t know what that best price they are getting is; all we know is that the PBM says, here is the deal we got.

It could very well be that there is an extra $2 or $3 a dose that

the PBM benefited from. And we may make the decision as taxpayers, you know what, that is OK, we are willing to pay that

45

price. The PBM is doing a valuable thing; they should get a piece

of the action.

Transparency is very important, and that is what your legislation seeks to do. I should point out that if there is a point of consensus in the health care debate—although sometimes my Republican friends don’t acknowledge it—is we all agree with the idea of

using market-based solutions. For those of us who support a single

payer plan, we believe get the biggest possible market to be able

to negotiate for lowest prices. All the health care plans that are out

there take the idea of having a big market, to use that market

strength to negotiate for lower prices, to use that. To do what WalMart does: take their big market pool and negotiate for the lowest

prices.

PBMs do help us do that. I don’t think that anyone should say

that PBMs are not created for that purpose. The question is: are

we getting the fullest benefit of it?

Now, in the House version of the health care bill we have PBM

transparency for everyone, not just for Federal employees. I believe

in the Senate bill it is also in there, with the philosophy being the

same thing: we may agree or disagree with what the PBMs are

doing, but we should have transparency.

I think if your bill becomes law here is what we will find that

will happen: the PBMs will still have every incentive in the world

to negotiate for the best prices for taxpayers, but we will have some

insight. Did they get an extra rebate here that maybe we want

more of? And your legislation, which says that 90 percent of what

you save should go back to the taxpayer seems like a reasonable

transaction fee. With 10 percent they are still going to do very well

for themselves.

So I think that your legislation is very important. I think that

all of us should be able to agree. What is the point of having this

big buying pool if we are not getting the benefit of it? That is what

PBMs are in the business of doing; we just want to make sure they

are in the business of doing it for the taxpayer, and that is the philosophy behind your bill and that is why I heartily support it.

[The prepared statement of Hon. Anthony D. Weiner follows:]

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Mr. LYNCH. Thank you, Mr. Weiner.

I realize that you have other committee obligations.

Mr. WEINER. I am a very busy man, Mr. Lynch.

Mr. LYNCH. All right.

Mr. WEINER. As you know, this health care debate will simply

not proceed forward without my presence.

Mr. LYNCH. Exactly. [Laughter.]

That is what I understand. So we are going to excuse you and

we are going to accept your testimony in full, and we thank you

for your attendance at this hearing.

Mr. WEINER. Thank you for your indulgence.

Mr. LYNCH. And for assisting the committee with its work.

Thank you.

I would like to call our second panel, if we could.

Before we proceed with the second panel, I would like to offer

time to my colleagues for a brief opening statement. The Chair now

recognizes the gentlelady from the District of Columbia, Eleanor

Holmes Norton, for 5 minutes.

Ms. NORTON. Thank you very much, Mr. Chairman.

Mr. Chairman, there are a quarter of a million Federal employees who are not covered by FEHBP at all, much less by its prescription drug program. That is a scandal. I am now talking about

people who can’t afford to be in a program where the Government

presumably pays 70 percent of the cost, although there is great cost

shifting in FEHBP. And of these programs, to have a benefit program or prescription benefit program where there is no regulation,

no negotiation, and no transparency required by the FEHBP is beyond belief, especially when you consider that prices for drugs for

Federal workers have been rising.

I did some work on the FEHBP, which is now modeled for what

we want to do in the health reform bill, and even the compact we

have has not kept prices down with FEHBP in the picture. So I

have no confidence in the prescription drug program, and I think

your bill, Mr. Chairman, goes some distance, particularly in the

transparency requirement—I would think that is 101 in any Federal bill—in moving us ahead.

Mr. Chairman, I cannot believe. Let us analogize ourselves to the

biggest Fortune 500 company. What is it, Wal-Mart? Can you believe that Wal-Mart, as the customer, would be buying drugs from

the same set of sources at different prices? Wouldn’t it be using its

buying power to make sure that if it were, to chase this analogy

further, the DOD or the VA, that those who work for the Federal

Government were getting the very same deal. That also escapes my

understanding.

Mr. Chairman, what you are doing about what you took testimony on at the last hearing concerning the conflict of interest with

some pharmacy owners could not be more important in your bill.

This has become a matter of national disgrace because it is now all

over the media about how these retail pharmacy owned companies

are bilking the public.

The time has come, Mr. Chairman, to move on your bill, and I

can’t thank you enough for, early in the year, bringing us to this

point today where we are doing a direct hearing on your bill.

Mr. LYNCH. I thank the gentlelady.

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The Chair now recognizes the gentleman from Maryland, Mr.

Cummings, for 5 minutes.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

Chairman Lynch, I really do appreciate your holding this hearing

on the Federal Employees Health Benefits Program Prescription

Drug Integrity, Transparency, and Cost Savings Act.

In June of last year, this subcommittee held a hearing to examine the contracting and pricing model used in the FEHBP, as well

as trying to determine whether the program’s drug benefit program

was a good value. We concluded that for both taxpayers and for

FEHBP subscribers, changes in the program’s contracting and pricing of prescription drugs was necessary in order to ensure that the

benefit was being administered in the most fiscally responsible

manner.

The FEHBP is the largest employer-sponsored health insurance

program in the country, covering over 8 million workers, Members

of Congress, and their families. Almost 30 percent of FEHBP premium payments are for prescription drugs. One of the major discussions during the June hearing was around the FEHBP being

charged more for its drugs than other Federal and commission programs.

I would agree with you, Mr. Chairman, and certainly Ms. Norton

that this is ridiculous.

During that hearing it was disclosed that it was difficult to determine if the FEHBP health plans were receiving a good price for

their drug benefits because of the complexity and the lack of transparency in these contracts.

On January 24th, I joined you, Chairman Lynch and Congressman Connolly in sponsoring H.R. 4489, the FEHBP Prescription

Drug Integrity, Transparency, and Cost Savings Act. This bill is designed to do several very important things: create greater oversight

authority to OPM relating to prescription drug benefits. It will also

require pharmacy benefit managers to return 99 percent of all

moneys received from manufacturers to the FEHBP business. It

will cap prices paid by the health plan to the average benefit price,

and require total transparency and disclosure of all contract terms

and related information.

However, I understand that there are some concerns around the

bill in its current form claiming a reduction in the choice and competition. Before we pass this legislation, we must look at this bill

very carefully from all angles, consider all of the consequences, intentional and unintentional, and what effect it will have on our

care and health benefits program.

The subcommittee has worked with several groups with vested

interest in the legislation. The hearing will discuss this bill and

specific ways to amend the bill going forward and efforts to

strengthen it and ensure its intended purpose.

I anxiously look forward to the testimony of today’s witnesses

and thank the chairman for his leadership.

I also remind all of us that our Federal employees give their

blood, their sweat, their tears to support all of us, and in our economy today every dime that they can save on prescription drugs or

anything else is very, very important.

So with that, Mr. Chairman, I yield back.

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Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the distinguished chairman of our full

committee, Mr. Towns of Brooklyn, for 5 minutes.

The CHAIRMAN. Thank you, Mr. Chairman. I don’t plan to use 5

minutes, because I am actually here to thank you and, of course,

Mr. Chaffetz, for holding this hearing, and to say to you, which is

something you probably never heard me say before, I am here to

listen.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentleman from northern Virginia,

Mr. Connolly, for 5 minutes.

Mr. CONNOLLY. I thank the Chair and thank the Chair of the full

committee. I am privileged and pleased to join with you, Mr.

Lynch, and with you, Mr. Cummings, as an original co-sponsor of

this legislation, which I think has the opportunity to create enormous efficiencies and to save hundreds of millions of dollars potentially in health care costs—something I think all of us can unite

behind.

This legislation does three things. First, it precludes a single

company from controlling both the PBM and the retail pharmacy.

The regulation is important because vertical integration between

the two eliminates market incentives wherein the pharmacist negotiates for lower prices. Eliminating this incentive through consolidation creates market conditions in which prices will rise disproportionately.

Second, the bill prohibits PBM from switching prescription drugs

without a physician’s consent. This important provision ensures

that Federal employees and their doctors, not bureaucrats in the

insurance industry, maintain control over health care. For too long,

PBMs have been able to switch to more lucrative drugs without the

physician approval, even if those drugs are not as efficacious or

beneficial to the patient.

Third, the bill requires PBMs to return 99 percent of money received from pharmaceutical manufacturers for business conducted

under the FEHBP. This provision ensures that taxpayers’ money is

not being used to subsidize middle men who don’t actually contribute much to health care services. It also protects Federal employees

from predatory pricing in which PBMs have reimbursed pharmacies for less than the amount paid for the health care plan.

As Dan Adcock said in NARFE’s prepared testimony on this subject, we strongly believe that nothing should be left to chance regarding OPM’s ability to access information. For that reason, we

believe that transparency should ultimately be legislated. When we

had hearings, it couldn’t have been clearer that, frankly, we have

to tighten up the regulation and oversight of PBMs to make sure

that, in fact, they are delivering quality services for our employees

and the requisite savings we know are there.

I thank the Chair for holding this hearing and look forward to

continued collaboration with him.

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

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Mr. LYNCH. I thank the gentleman.

As with the previous panel, Mr. Weiner, you understand that it

is the custom before this committee to swear all witnesses, so I

want to welcome our witnesses and ask you all to rise and raise

your right hands.

[Witnesses sworn.]

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

each answered in the affirmative.

What I will do is I will offer a very brief introduction of each of

the witnesses, and then we will have testimony from each.

Mr. John O’Brien is the Director of Planning and Policy Analysis

at the Office of Personnel Management. He joined with OPM in

April 2009. Prior to that, Mr. O’Brien was the deputy director for

research and methodology at the Maryland Health Services Cost

Review Commission.

Mr. Patrick McFarland was nominated Inspector General of the

Office of Personnel Management in 1990. As Inspector General, Mr.

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

fraud and mismanagement in programs administered by the Office

of Personnel Management. Mr. McFarland is also a member of the

Council of Inspectors General on Integrity and Efficiency.

Representative Sharon Treat is currently in her fifth non-consecutive term in the Maine State House of Representatives. Previously she serve four terms in the Maine State Senate, including

two as Senate Majority Leader. Representative Treat is also the executive director of the National Legislative Association on Prescription Drug Prices, a nonpartisan organization of State legislators

working jointly across State lines to reduce prescription drug prices

and to expand access.

Ms. Jasmin Weaver is the Healthcare Initiatives legislative director of Change to Win, where she has been working on health

care policy, addressing issue including patient privacy, medication

errors, and PBM transparency and reform. Before joining Change

to Win, Jasmin worked for the Chair of the House Health Care

Committee in Washington State and worked on higher education

policy issues at Harvard University.

Mr. Jonathan Boehm has been president and chief executive officer of Argus Health Systems, Inc., since 2006. As president and

CEO, Mr. Boehm is responsible for all aspects of pharmacy benefit

solutions offered to market by Argus Health Systems, including

nearly 600 million claims processed annually, and 20 percent of all

Medicare Part D claims processed in the United States.

Mr. Richard Beck is the executive director of the Texas Pharmacy Business Council, a new independent pharmacy advocacy organization dedicated to ensuring patient access to quality pharmacy care services. Mr. Beck is also the vice president of Pharmacy

Affairs at American Pharmacies, which is a member-owned, independent pharmacy buying co-op.

Welcome to all. Mr. O’Brien, you are now recognized for 5 minutes.

Let me just back up a little bit. You see this little box in front

of you? The green light signals that you may proceed with your testimony; a little yellow light will indicate that you should probably

53

wrap up, you have about a minute; and then the red light would

mean that your time has expired.

Thank you.

Mr. O’Brien, 5 minutes.

STATEMENTS OF JOHN O’BRIEN, SENIOR ADVISOR TO THE DIRECTOR, U.S. OFFICE OF PERSONNEL MANAGEMENT; PATRICK MCFARLAND, INSPECTOR GENERAL, U.S. OFFICE OF

PERSONNEL MANAGEMENT; SHARON TREAT, ESQ., STATE

REPRESENTATIVE FROM MAINE AND EXECUTIVE DIRECTOR,

NATIONAL LEGISLATIVE ASSOCIATION ON PRESCRIPTION

DRUG PRICES; JASMIN WEAVER, HEALTHCARE INITIATIVES

LEGISLATIVE DIRECTOR, CHANGE TO WIN; JONATHAN

BOEHM, PRESIDENT AND CHIEF EXECUTIVE OFFICER,

ARGUS HEALTH SYSTEMS INC.; AND RICHARD BECK, TEXAS

PHARMACY BUSINESS COUNCIL

STATEMENT OF JOHN O’BRIEN

Mr. O’BRIEN. Chairman Lynch, Ranking Member Chaffetz, and

members of the subcommittee, I am pleased to be here on behalf

of Director John Berry of the Office of Personnel Management to

discuss H.R. 4489, the Federal Employees Health Benefits Program

Prescription Drug Integrity, Transparency, and Cost Savings Act.

I would like to submit a written statement for the record, and

I will summarize briefly here.

OPM commends Chairman Lynch and the subcommittee is continued efforts to strengthen the agency is oversight authority regarding FEHB prescription drug benefits. Prescription drugs represent a significant portion of the $39 billion FEHB program, comprising almost 30 percent of all expenditures, and are a valuable

benefit to enrollees. In light of its importance, we are committed

to ensuring that the FEHB prescription drug benefit is cost effective, transparency, and provides enrollees with a comprehensive

quality coverage.

The bill attempts to expand OPM’s authority to regulate drug

benefits offered by FEHB insurance carriers, including relationships with pharmacy benefits managers, pharmaceutical manufacturers and pharmacies. The bill outlines a uniform purchasing

strategy for all FEHB carriers, including price-based, on-average

manufactured price. It prohibits certain ownership relationship, restricts non-generic drug substitutions by PBMs, and requires PBM

transparency and disclosure of all contract terms and related information.

OPM agrees with the subcommittee that transparency and ethical business practices are an essential element of an effective

FEHB prescription drug program. Since 2005, our carrier contracts

have included PBM transparency requirements. These requirements include restrictions and protocols relating to PBM drug substitutions similar to those in the bill.

We are currently in the process of updating these contractual

transparency requirements and we are concerned that this bill legislates PBM pricing and purchasing terms for FEHB carriers. Requiring the use of specific contracting models and pricing methods

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via legislation will not allow the program flexibility in an industry

where business practices are rapidly evolving.

We believe that these models and methods would be better addressed in the contracts with our carriers, allowing the program

and its health plans to accommodate changing industry practices.

Additionally, there may be administrative costs for OPM as well

as carriers that would be passed on to enrollees as a result of certain sections of the bill. For example, the bill requires PBMs to

comply with extensive reporting requirements to the agency, carrier, and the enrollee. While we believe that disclosure is important, a balance must be struck to ensure that these administrative

requirements do not impose significant costs upon enrollees and

the Government. We do recognize that further efforts are needed

to improve cost and pricing transparency related to FEHB prescription drug benefits.

Following the hearing that this committee had last June and

going forward, an agency work group, including representatives of

the OPM’s Inspector General’s Office, has been working on contracting requirements using administrative authority currently

available to us. The Inspector General’s Office was instrumental in

developing requirements for large providers, including PBMs, that

were incorporated in 2005. Their onsite audit experience has proven very useful to the current work group discussions.

The work group developed a set of transparency principles to be

followed when negotiating specific contracts by carriers. These

principles were spelled out in OPM’s February 22nd carrier letter

which was sent out to carriers and has been shared with the committees. One example is requiring pass-through transparent pricing

in contracts with PBMs in which the carrier receives the full value

of the PBM’s negotiated discounts, rebates, and other credits.

We will continue to work with the OPM Inspector General to ensure that FEHB contracts are regularly updated and reflect the

changing marketplace, that transparency principles are adhered to

and enforceable.

In addition, we are reviewing a broad range of options for improving our current contractual procedures and redesigning how

prescription drug services may be purchased. Many of the options

that we are investigating were identified by this committee in its

September forum. Our goal is to obtain the best and most affordable product for our enrollees.

As the subcommittee continues to examine this important issue,

our agency remains willing to work with you. We would be glad to

provide technical assistance to address our concerns with the specific issues in the bill.

Thank you for this opportunity to testify on the provisions of

H.R. 4489.

[The prepared statement of Mr. O’Brien follows:]

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Mr. LYNCH. Thank you, Mr. O’Brien.

Mr. McFarland, you are now recognized for 5 minutes.

STATEMENT OF PATRICK MCFARLAND

Mr. MCFARLAND. Good afternoon, Mr. Chairman and members of

the subcommittee.

To best serve the committee’s goals of establishing transparency

and equity in the many protocols of prescription drug costs, my testimony and discussion today will attempt to contrast the work

progress of OPM with the intent and vision of your proposed legislation, providing, hopefully, a value-added component for your final

decisionmaking.

In our estimation, the single most important FEHBP issue which

OPM must resolve is the fact that it is dealing with PBMs from

a perspective in which the cost structure of the PBMs are utterly

non-transparent. This means that there is no objective basis to determine now or in the future if the terms being offered to an

FEHBP carrier by a PBM represent an advantageous arrangement.

From our perspective as the agency’s audit component, we find

the absence of transparency to be deeply troubling; however, with

the recent work progress of OPM, I believe that the agency is now

moving with a firm purpose of amendment regarding the PBM industry. For years, real corrective action has been dormant, at best.

OPM has certainly not been a strong player in wrestling with the

rising cost of prescription drugs.

Today, however, separate entities are responsible for a forward

thrust of enthusiasm. Namely, the health care expertise of two senior advisors to the Director of OPM and the strong focus and hard

work of this committee to get something meaningful accomplished.

Specifically, OPM, in concert with our office, will advance certain

principles that will be incorporated into existing and future contracts with fee-for-service health plan carriers such as the Blue

Cross/Blue Shield Association. These principles will require the

PBMs pass all discounts, rebates, and other financial incentives or

payments through to the carriers, and that the PBM’s only remuneration in connection with the contract is from the FEHBP carrier, itself. In effect, the drug cost passed through the carrier would

be based on the cost of the drug plus a reasonable fee for the

PBM’s services, such as administrative fees. All relevant documents, including contracts with drug manufacturers, would be

available to my office for audit.

If these principles are quickly and properly implemented by

OPM, I believe most, if not all, of my concerns about the lack of

transparency in the FEHBP PBM contracts will be resolved; however, as always, the devil is in the details. For example, without

additional resources, it is difficult to see how OPM will be able to

fully implement these principles. Also, I am concerned that the existing PBM contracts may be allowed to continue for years before

the new principles are incorporated. It may be more prudent to require the fee-for-service carriers to comply with the principles no

later than 2012 plan year.

Finally, I am concerned that the principles may be changed before they are incorporated into the FEHBP FFS contracts. Presently, there are several proposed contract changes that serve to imVerDate 11-MAY-2000 15:56 Oct 08, 2010 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 U:\DOCS\58135.TXT KATIE PsN: KATIE
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plement the principles being introduced into the FEHBP’s pharmacy benefit program. The revisions are grouped into the following

categories: pricing requirements, document access, electronic data

access, the selling of utilization data, financial benefit administration, and sanctions.

I have also several minor concerns with the act, itself. For example, OPM may not have the resources or expertise to determine

maximum allowable dispensing fees. The heading ‘‘civil monetary

penalties’’ is somewhat confusing because the section deals primarily with False Claims Act rather than civil monetary penalties.

The ability of PBMs to retain 1 percent of rebates may result in

current discount arrangements being converted to rebates. Providing incentives to PBMs to reduce overall drug cost is an excellent

strategy; however, legislation should be careful not to strictly limit

incentive options.

It is questionable whether interim final regulations can be issued

within 6 months of enactment because of the complexity of the subject matter and the lack of agency resources.

Despite my concerns, the status quo must be changed. I believe

that the amendment to the Federal Employees Health Benefits Act

on Pharmacy Benefits can be beneficial, particularly if OPM does

not quickly require FFS FEHBP carriers to enter into the PBM

contracts that require clear, pass-through transparent pricing. A

pass-through pricing model, in our opinion, would be easier to administer and fair to all parties.

All this having been said, I would respectfully suggest that during further deliberations this committee might give favorable consideration to the following: that the principles presently being proposed by OPM be also addressed in this legislation. My primary

concern for making this request is that if, in fact, OPM may be directed to be an integral part of the health care reform, said inclusion of these stated principles in legislation would guarantee that

the issue would remain a high priority.

In closing, I want to express a most noteworthy thank you to this

committee for this proposed legislation. Regardless of the outcome,

whether it be enacted into law or a decision is made to allow

OPM’s substantive proposals to prevail, I can state first-hand that

this Office of the Inspector General, especially our entire audit

staff, applauds this particular pursuit of accountability resulting in

better Government.

Thank you.

[The prepared statement of McFarland follows:]

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Mr. LYNCH. Thank you, sir.

Representative Sharon Treat, I bid you welcome. You are now

recognized for 5 minutes.

STATEMENT OF SHARON TREAT

Ms. TREAT. Thank you very much.

Chairman Lynch and members of the subcommittee, my name is

Sharon Treat. I am an attorney, a Member of the House of Representatives in the State of Maine, and director of the National

Legislative Association on Prescription Drug Prices, where I work

with over 400 legislators who receive our electronic newsletter and

provide information around the country on a variety of prescription

drug legislation, but a good deal of it focused on pharmacy benefit

managers.

I hope to provide a bit of a State perspective on H.R. 4489, which

I wholeheartedly support, and also to offer a few suggestions which

I think would improve the legislation and assure its effectiveness.

In 2003 I sponsored Maine’s PBM law, which was the first in the

country to very comprehensively regulate pharmacy benefit managers, imposing a fiduciary duty and requiring PBMs to disclose

possible conflicts of interest and pass through to their clients, including the State of Maine and the State Employee Health Plan,

the full monetary value of the rebates that they negotiate.

At least 18 States and the District of Columbia now require oversight and/or regulation of pharmacy benefit managers. These vary

from very prescriptive legislation to fairly minimal registration provisions. The States are responding to the nearly absent Federal

role regulating PBMs and the PBM business model that relies on

secrecy, convoluted payment transactions that virtually no one can

understand, and a model that is rife with conflicts of interest.

I note that the Maine legislation that I worked on I did with our

then Attorney General, Steve Roe, at a time when we had a consent decree ongoing with Medco, which imposed many of the same

provisions into the consent decree.

The Federal District Court decision which upheld the Maine law,

which actually went all the way up to the U.S. Supreme Court,

which denied cert, stated, I think particularly well, what the problems are with the PBM business model, and it addressed the advantages of regulation. The court stated: whether and how a PBM

actually saves an individual benefits provider money with respect

to the purchase of a particular prescription drug is largely a mystery to the benefits provider. This lack of transparency also has a

tendency to undermine a benefit provider’s ability to determine

which is the best proposal among competing proposals from a PBM.

For example, if a benefits provider has proposals from three different PBMs for pharmacy benefits management services, each

guaranteeing a particular dollar amount of rebate per prescription,

the PBM proposal offering the highest rebate for each prescription

filled could actually be the worst proposal as far as net savings are

concerned, because that PBM might have a deal with the manufacturer that gives it an incentive to sell or restrict its formulary to

the most expensive drugs.

In other words, although PBMs afford a valuable bundle of services to benefit providers, they also introduce a layer of fog to the

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market that prevents benefit providers from fully understanding

how best to minimize their net prescription drug cost.

I would note that H.R. 4489 appropriately addresses many of

these issues, including drug switching, failure to pass through the

value of rebates and other discounts, discriminatory practices toward independent pharmacies, and lack of transparency.

Based on the State’s experience, regulation of Federal PBM contracts will reduce employee health insurance costs and avoid consumer harms caused by drug switching, errors, and conflicts of interest.

Nonetheless, I believe there is room for improvement in this legislation. One thing I would just parenthetically note, in reading

through the background materials on this legislation, pharmacy

costs making up 25 percent of this Federal health employee plan,

the fee-for-service plan, is a very high percentage spent on pharmacy. It is really out of whack when you look at what the percentage is in other programs, other policies nationwide, in terms of a

percentage of health care costs, and also Medicaid.

So specifically what I think this legislation should be doing,

though, in addition is that I think that the conflict of interest provisions need to be tightened up. It is great that the legislation prevents conflicts that involve a controlling interest; however, there

are many conflicts of interest built into the PBM business model

which result in higher prices or have other negative impacts which

don’t rise to a controlling interest. At the very least, H.R. 4489

should explicitly require PBMs to disclose in writing ‘‘any activity,

policy, or practice that directly or indirectly presents any conflict

of interest.’’ This is language currently in Maine law, so you won’t

be breaking any ground.

And then, in addition, we would ask that you consider adding a

fiduciary duty provision to ensure that a PBM is actually acting on

behalf of the plan. For example, Maine law requires a PBM to perform its duties with care, skill, prudence, and diligence in accordance with the standards of conduct applicable to a fiduciary in an

enterprise of like character with like aims.

In conclusion, I commend the sponsor for tackling this important

and rather difficult issue and taking a comprehensive approach.

We look forward to working with you and making sure that comprehensive legislation is enacted that will cut the cost of prescription drugs for Federal employees.

Thank you.

[The prepared statement of Ms. Treat follows:]

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Mr. LYNCH. Thank you, Representative.

Ms. Jasmin Weaver, you are now recognized for 5 minutes.

STATEMENT OF JASMIN WEAVER

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

the committee. My name is Jasmin Weaver, and I am the

healthcare initiatives legislative director at Change to Win, a 6 million member partnership of five unions: SEIU, UFCW, Teamsters,

the Laborers, and the Farm Workers. Four of our five affiliate

unions represent Federal workers, and our members across the

country are facing rising prescription drug costs, so we have a

strong interest in improving the FEHBP and the PBM industry.

We are thrilled to be here today to voice our unqualified support

for H.R. 4489. We believe this bill will save Federal workers and

the Federal Government hundreds of millions of dollars, and we

thank Chairman Lynch and the subcommittee for your work on

this important issue.

This bill is necessary because, although PBM can provide a useful service, they are also in a position of trust that makes it possible for them to engage in a variety of troubling practices.

First, many PBMs provide virtually no transparency to the

health plans that they serve, refusing to disclose such basic information, as you have heard today, as how much they pay for the

drugs that they help to provide.

Second, some PBMs engage in spread pricing, charging the

health plans they serve more for the drugs than they paid pharmacies that then distribute those drugs to patients.

Third, PBMs may also switch a patient’s drug to a drug other

than the ones their doctor prescribed, a drug more expensive for

the health plan and the patient, because that PBM is getting rebates from drug manufacturers.

And, finally, some PBMs have merged with retail drug stores or

drug manufacturers, creating serious conflicts of interest.

This bill addresses all of these problems. It totally enhances

transparency, it bans spread pricing, it prohibits drug switching

that is designed solely to enhance the profits of the PBM, and it

reduces conflicts of interest in FEHBP drug contracting by extending OPM’s current ban on PBM contracts that are with a PBM that

is owned by a drug manufacturer, to also extend that ban to PBMs

that are owned by retail drug stores.

By fixing these problems, this bill should significantly reduce

drug costs for Federal employees and the Federal Government. Although the FEHBP is the largest employer-sponsored health plan

in the country, and thus should receive the best prices, as you have

heard today it is currently spending 15 to 45 percent more for prescription drugs than other Federal programs. Many other Government plans and private employers have saved millions by switching

to more transparent PBM contracting. The Federal Government

cannot afford to pass up these savings, as the FEHBP currently

spends over $10 billion a year on prescription drugs for the

FEHBP.

Change to Win recently released a report that further highlights

the need for this bill. Our report focused on CVS Caremark, a PBM

drug store combination that currently manages 80 percent of the

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pharmacy benefit within the FEHBP. CVS offers a generic discount

program that any person can sign up for. After paying $10, you get

access to hundreds of generic drugs for $9.99. So we compared this

$9.99 price to the price that Federal employees and the Federal

Government pay under the Blue Cross/Blue Shield Federal employee program, which is the largest health plan within the

FEHBP. What we found is that, remarkably, FEP members and

the Government together pay more than $9.99 for 85 percent of the

drugs on this discount generic list, and sometimes far more—up to

$200 more for the exact same drug. Thus, FEP members and the

Government are actually made worse off by using their insurance

to buy these drugs.

This underscores the need for greater transparency in the

FEHBP. It is hard to imagine that OPM and Federal employees

would agree to this situation if they knew what they were really

being charged. In fact, a recent poll of FEHBP members found that

74 percent of them think that more should be done to lower the

cost of their prescription drugs, and 73 percent of plan members

surveyed would support legislation to do this.

In conclusion, the reforms in this bill take the FEHBP a huge

step forward, and that is why we wholeheartedly support it.

Thank you for your time.

[The prepared statement of Ms. Weaver follows:]

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Mr. LYNCH. Thank you.

Mr. Boehm, you are now recognized for 5 minutes.

STATEMENT OF JONATHAN BOEHM

Mr. BOEHM. Good afternoon, Chairman Lynch and members of

the subcommittee. Thank you for inviting me to testify today.

Again, my name is Jonathan Boehm, and I am president and

CEO of Argus Health Systems. Argus is one of the largest pharmacy benefit administrators, processing over 500 million claims in

each of the last 4 years. This total includes a significant portion of

Medicare Part D. We process 24 percent of all Part D claims in the

United States. We process claims for customers with 5 million Part

D members and 25 million commercial members.

Our business model, however, is very different than many of our

competitors. We generally offer services on a fee-for-service, fully

disclosed, auditable basis. We refer to our model as a transparent

model, and we have been doing business this way since 1999.

To provide context regarding transparency in the pharmacy benefit, let me define what I mean by transparency. David Calabrese

stated in the May 1, 2006, issue of Managed Care Executive, ‘‘True

transparency is a model in which all PBM revenue streams are

fully disclosed to the payer, the full value of retail and mail order

pharmacy discounts is passed on to the client, data is shared with

the client, and the client is given ultimately decisionmaking control

over its drug benefit design and formulary management.’’ At Argus

we embrace this business model and this definition.

In our transparent model we provide fully auditable access to

data, enabling our customers to comprehensively manage their

business for the benefit of their members. Consistently our customers have told us when they transitioned to our model from a

traditional PBM they save 8 to 10 percent on their drug spend day

one.

Our customers achieve generic dispensing rates of well over 70

percent, compared to mid-60 percent industry averages, because access to their data enables them to make more-informed decisions

and work with providers and members to achieve the desired expense and health outcomes.

Another difference in the Argus transparent model is that we do

not own a mail order facility or drive members to mail order; rather, we support 90-day prescription strategies that support mail

order and 90 days at retail, whatever method the member deems

most convenient for them. This is a significant difference from

PBMs that own mail order and drive utilization to this distribution

method, regardless of member preference.

There clearly are divergent views regarding the impact of transparency on managing the pharmacy benefit. This committee has

heard and I have reviewed testimony from both sides of the argument. After reviewing available Federal-Government-related material, it is clear there is no consensus regarding the impact of transparency on ultimate cost. There have been reports of estimated increased costs, unknown impact on cost, and the CBO recently

scored the Cantwell transparency amendment as budget neutral.

The position that the disclosure of sensitive price information

would negatively impact negotiating leverage of pharmaceutical

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manufacturers and pharmacies appears to be predicated on the

premise that this information would be generally available for public consumption. This bill clearly treats this information as confidential and could only be used by OPM, and I think invalidates

the premise that it would raise costs.

The final point that I would make regarding the importance of

transparency is I would suggest that it is more important in the

pharmacy benefit management than even in other industries, and

that is because the products and services are not procured at a specific price but rather a pricing construct. Without visibility into the

true cost and rebate arrangements, the pricing construct cannot

only not be validated or audited, but it is invalid by the premise

that it is based on the unknowable.

The Inspector General, Patrick McFarland, testified before this

committee in June and reiterated again today that the single most

important issue which OPM must resolve is that PBMs are utterly

non-transparent. He went on to say that we find the absence of

transparency to be deeply troubling.

In conclusion, it is my view that effective management of pharmacy benefits is fundamental to reducing prescription drug costs

and improving the quality of health care outcomes in both the public and private sector. Effective management of this benefit is dependent on transparent access to the relevant information.

Chairman Lynch, it is my view, given our customers’ experience

as well as my research into the issues, that your proposed legislation will be beneficial to OPM by enabling them to have access to

information so better decisions regarding health care costs and outcome management can be made on behalf of the Federal employees

and ultimately the taxpayers. The confidentiality provision that

you have included will mitigate the risk that disclosure of sensitive

price information will result in increased costs to administer prescription benefits.

Thank you.

[The prepared statement of Mr. Boehm follows:]

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Mr. LYNCH. Thank you, Mr. Boehm.

Mr. Beck, you are now recognized for 5 minutes.

STATEMENT OF RICHARD BECK

Mr. BECK. Good afternoon, Chairman Lynch and members of the

subcommittee. My name is Richard Beck, and I am testifying here

before you today on behalf of the National Community Pharmacists

Association in support of H.R. 4489. NCPA represents the interests

of pharmacists, owners, managers, and employees of more than

22,700 independent pharmacies across the United States. We appreciate the opportunity to address the topic of pharmacy benefits

management regulation. I am also executive director of the Texas

Pharmacy Business Council, which represents approximately 1,700

community pharmacies in Texas.

Today I will share with you the reasons we support this bill, as

well as some of our experiences and lessons learned from our PBM

advocacy activities in the State of Texas.

Both NCPA and TPBC have long championed the need for both

Federal and State oversight of pharmacy benefit managers. That is

because our members and their patients continue to face significant

problems in dealing with these unregulated entities. PBMs have

been permitted to operate virtually unchecked since their inception,

slowed only by the increasing amount of litigation alleging fraudulent and deceptive practices filed against the PBMs each year, including the Federal Government.

First I would like to speak in support of H.R. 4489, a crucial

piece of legislation that would provide OPM with greater insight

into the inner workings of the various PBMs that currently manage

the prescription drug benefits for FEHBP. That is a tough one, isn’t

it, Mr. Chairman. We strongly support H.R. 4489 for many reasons.

It would require the reporting and pass-through of the rebates that

PBMs receive from manufacturers. It would expose some of the

questionable practices that PBMs frequently engage in, including

repackaging and assigning different reimbursement rates for drugs

dispensed by their own mail order pharmacies.

It would prohibit PBM ownership of retail pharmacies, thereby

eliminating the inherent conflicts of interest that results in higher

costs and impaired quality of care. One has to look no farther to

justify this prohibition than looking at the anti-competitive and

anti-consumer activities exhibited by the CVS Caremark Corp.

merger.

Let me now talk about our experiences in the State of Texas and

how our legislature and Governor have been supportive of PBM

transparency in State contracts.

A few years ago the State of Texas concluded that the disclosure

of the business practices of PBMs in their dealings with government entities is essential to ensuring that the government entity

is receiving high-quality, cost-effective services. In 2006, a joint legislative committee issued a report that detailed many of the questionable drug prices used by the PBMs and recommend the State

take steps to ensure that they were getting the most bang for their

buck with regard to PBM services. Representative Treat testified

before that committee.

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The State auditor followed up with its own study in 2008 and

delved more deeply into the specific PBM contracts held by various

State agencies. The results of the study clearly indicated that the

State agencies needed to include in all future PBM contracts provisions that clearly specified the costs, discounts, and other fees associated with services provided by the PBM, as well as provisions

that would preserve their ability to audit the PBM.

In 2009, after several years of considering various pieces of legislation, the legislature passed PBM transparency legislation. The

passage of Senate Bill 704 now enables Texas State agencies to

share the terms and conditions of their PBM contracts with other

State agencies, as well as grant them full audit rights over those

contracts. In Texas we plan to pursue followup legislation to

buildupon the 2009 legislation.

The Texas PBM studies and consideration of related legislation

has provided an invaluable education to State legislators and decisionmakers, alike, about the need for PBM regulation, and has had

a positive impact on the content and terms of subsequent PBM contracts to the State of Texas.

The Texas State Employees’ Retirement System, who initially,

along with CVS Caremark, opposed the 2007 PBM transparency

legislation in Texas, recently reported that the terms of their contract include many of the elements of that legislation, including

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Curiously, although CVS Caremark has apparently agreed to

these contract provisions, they and other large PBMs still continue

to oppose legislation to recognize these same principles in State

and Federal law.

In conclusion, I strongly urge you to pass the bill before you

today. The PBM industry, as they have done in Texas, is likely to

use scare tactics in an effort to convince you and the American taxpayers that transparency may be harmful and expensive and that

they require secrecy to administer the drug benefits of FEHBP.

There is simply no credible evidence that transparency has increased costs or will do so in the future.

I urge you to reject this paradoxical reasoning and insist that

OPM be afforded the disclosures necessary to negotiate a fair contract in order to curb unnecessary prescription drug spending.

Thank you.

[The prepared statement of Mr. Beck follows:]

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Mr. LYNCH. Thank you, Mr. Beck.

I want to thank you all for your very helpful testimony. Let me

begin. I yield myself 5 minutes.

It is confounding, at best, to listen to the arguments of some of

the opponents of this bill to say that, as they have in the past, that

transparency is over-rated, and that somehow if we let people know

what things cost, then prices are going to go up.

Ms. Treat, you have been terrific in offering some very helpful

suggestions to improve our legislation, and we really do appreciate

that. Let me ask you, you hit right on the point of fiduciary responsibility, and putting fiduciary responsibility on our PBMs so that

their duty is clear and the duty is enforceable on the part of the

subscriber, in this case the Federal employee.

How do you see this conflict that we have here, at least in the

case of CVS Caremark, where we have the PBM owned—the PBM

which I believe even now, without the legislation, has a duty to the

Federal employee to get the best price, while at the same time they

are owned by a pharmacy chain that is trying to drive people in

the door to maximize profit, which is clearly a fine and noble and

capitalistic motive, but it seems, at least to me, that those interests

are in conflict. I think that your suggestion of imposing a fiduciary

responsibility on the part of the PBM gets right at that conflict.

Could you offer your own thoughts on that?

Ms. TREAT. Yes. Thank you for the question.

I sponsored the legislation back in 2003. It took several years in

and out of the courts, actually, and it was the fiduciary provision

that was litigated, and it related to ERISA plans, something you

don’t have a problem with in this case. Nonetheless, we won that

litigation. But that bill came out of a similar situation involving a

drug manufacturer, Merck, which at that time owned MedCo, and

so you had a conflict of interest between a manufacturer with

whom the PBM was supposedly negotiating good discounts and rebates on behalf of whoever hired them and a drug company, which

had an appropriate goal of maximizing its profits.

I think that there is a very similar problem now where you have

retail pharmacies and PBMs which also their ownership overlaps.

We see now that one of the fastest growing segments of the pharmaceutical drug spend is for specialty drugs, and there is a real effort on the part of a number of entities to get into that market and

to have controlling or partial interest in the specialty drug pharmacy area. There are a number of areas where there could be conflicts of interest that would perhaps dissuade a PBM from perhaps

negotiating the toughest deal they could with those entities.

Mr. LYNCH. Right.

Ms. TREAT. I think the reason that I am really recommending

looking at the language that you use in asking for disclosure on

conflicts of interest and perhaps having something of a catchall

provision with the fiduciary language is that we cannot know today

what new business models are going to be dreamt up tomorrow.

Mr. LYNCH. Right.

Ms. TREAT. We often know that legislation that we pass and regulation that we pass end up, a response is, well, what is a good

way to get around that to do something different. I think the value

of the Maine language is that it is designed to not enumerate every

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single possible conflict of interest in advance, but to have general

enough language that, if something arises in the future, it will be

addressed.

Ms. TREAT. Right. That is great. Thank you very much.

My time is pretty much expired. I was neglectful, however, in

failing to recognize the gentleman from California, Mr. Bilbray,

earlier for an opening statement and questions, so, Mr. Bilbray,

you are recognized.

Mr. BILBRAY. Thank you, Mr. Chairman.

Just curiosity, Representative Treat. What is the population of

Maine today, just for my own information?

Ms. TREAT. It has been hovering around 1.3 million for the past

decades, many decades.

Mr. BILBRAY. Thank you. Everybody keeps moving out and coming over to visit us in San Diego. Just shows you how the shift has

gone. Our county is 3.5 million, but the population the way it

shifts, I am just trying to remember the sizes here. As a local legislator, I am interested in a lot of how these work and how the process works through different levels.

Mr. LYNCH. I thank the gentleman.

The Chair recognizes the gentlelady from the District of Columbia, Ms. Eleanor Holmes Norton, for 5 minutes.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. McFarland, you have in your testimony some claims costs

per member. You note them increasing almost twice the amount

paid in 1999. Compared to what? How would that compare to

claims costs for other programs? Are there figures that would allow

us to measure those increases? You say, for example, drug costs increase is an average 13.5 percent. That is cost as opposed to claim

cost per member. But in either case, how do those compare with

those not in a program like the prescription drug program of the

FEHBP? Mr. O’Brien.

Mr. O’BRIEN. In terms of the pharmacy cost for the FEHBP program compared to other programs that would exist, one issue that

needs to be clear is it was stated earlier that the FEHBP share of

pharmacy spend compared to a large private employer appears

very high. That is always the case, because the FEHBP program

includes the coverage of Federal retirees, which a typical private

program would not.

Ms. NORTON. The Federal program is what?

Mr. O’BRIEN. The Federal program includes Federal retirees, in

which case most of their costs are, in fact, drug costs, so our percentage of drug costs relative to a large company——

Ms. NORTON. Most of whose costs are drug costs? I am sorry?

Mr. O’BRIEN. Most Federal retirees, those who are over 65.

Ms. NORTON. Oh, because of retirees?

Mr. O’BRIEN. So our drug cost——

Ms. NORTON. Wasn’t that true for many programs, retirees as

well as current employees are in the same program?

Mr. O’BRIEN. The FEHBP program is somewhat unique in that

when you look at our total costs, the retiree cost is with all the

other costs in there, so the statement that our pharmacy spend as

a percentage is very high is really comparing apples and oranges.

Ms. NORTON. I see. Since they are all in the same program.

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Mr. O’BRIEN. Yes.

Ms. NORTON. I understand. I am somewhat confused by your testimony, Mr. McFarland, because it seems to say let us do it, we are

doing it, but there is a section of the testimony where it does say

that we will need some legislation, and you seem to oppose legislation mostly because there were administrative costs, which leads

me to ask what about the administrative costs that are built into

what OPM does with FEHBP.

Mr. MCFARLAND. Well, my understanding of——

Ms. NORTON. I mean, are you, in fact, doing what the Lynch bill

does, perhaps stimulated by the Lynch bill? Or do you concede that

we do need legislation?

Mr. MCFARLAND. As I said in my testimony, the previous testimony that is on record and the shortened version that was made

today, is that I would suggest that what OPM is presently doing—

and that is that they are identifying the principles that are very

important to making transparency happen—that those principles

per se be considered to be put in the legislation that we are presently discussing. So in no way did I say that we shouldn’t have legislation.

Ms. NORTON. So you are saying it is important enough to have

them and to have them in statutory language?

Mr. MCFARLAND. Well, and my particular reason for suggesting

that is that if, by chance, the direction is given to OPM to be an

integral player in the health reform act, then I think that so much

could fall between the cracks, and if it is in legislation I think that

probably would be very helpful to maintain its priority.

Ms. NORTON. In DOD and VA, are there multiple plans to choose

from, as with FEHBP?

Mr. MCFARLAND. No, I don’t believe that they have the same program that we do.

Ms. NORTON. I am sure they don’t, but I am saying they buy as

a single customer. I am asking that, for those who subscribe, is

there one plan and only one plan for DOD and for VA?

Mr. MCFARLAND. Well, I think the DOD and the VA have different approaches to their prescription drugs than what we are

talking about for the FEHBP.

Ms. NORTON. Mr. Chairman, I realize my time is up, but I do

need to know whether or not——

Mr. LYNCH. I will give you another 2 minutes.

Ms. NORTON. Thank you.

I do need to know if veterans, if the largest part of the bureaucracy, the DOD, maybe they are so different that they really are apples and oranges. If so, I would like you to explain.

Mr. MCFARLAND. Well, the DOD and the VA, they each have

their separate plans.

Ms. NORTON. I understand. Staff says—is it VA that has three

or four plans?

Mr. MCFARLAND. They have regional plans, like four regional.

Ms. NORTON. What I am trying to find out, if they have multiple

plans, is—and perhaps this information could be transmitted to the

chairman. I am wondering how they do transparency, how they assure.

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Mr. MCFARLAND. Well, I am not sure at all that they are able

to identify transparency.

Ms. NORTON. Well, then, I would ask you to find out. That is to

say I am very bothered by the fact that such a large percentage of

the prescription drug dollar is, in fact, in another section of the

Federal Government. I simply want to know if there is something

we can learn from them or if we are reinventing the wheel here.

And, if so, then that has to be the case.

Mr. O’Brien.

Mr. O’BRIEN. Congresswoman Norton, thank you. Again, urged

on by this committee, OPM staff has, in fact, met with DOD and

the individuals who run the Tri Care program to try and learn

about how their pharmacy program works. It is much more of a

single contract for pharmacy benefits that they run nationwide

with separate regional sub-contracts. Again, we are actively studying it, and we have had some very good feedback from the Tri Care

folks, and it is a very interesting model that we are learning a lot

more about.

Ms. NORTON. And you think that some of that model may be

transferrable to some of what you are trying to do today?

Mr. O’BRIEN. Again, we are actively studying that, as well as the

other options that were offered by this committee in its forum in

September. We haven’t completed our analysis, but we are actively

looking at it, and when we have completed it we look forward to

working with you more on those issues.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. O’BRIEN. But thank you, Tri Care is a very useful model for

us to look at.

Ms. NORTON. I thank you, and I thank you, Mr. Chairman, for

the additional time, because it is becoming more and more difficult,

given the scarcity of Federal dollars, for us to rationalize different

treatment of large sections of the Federal budget for essentially the

same purpose.

Thank you, Mr. Chairman.

Mr. LYNCH. I thank you.

I yield to myself 5 minutes.

Mr. O’Brien, part of your testimony is more than a little disappointing, I think, for us in that previous testimony from OPM

has been of a similar vein. At one point one of the witnesses from

OPM said that ‘‘transparency is over-rated.’’ That is a tough thing

for an oversight committee to hear.

We are intensely interested in getting to the bottom of what costs

actually are for our health care system, and I know that you came

out with a very positive carrier letter yesterday, though, in advance

of this hearing. Sometimes I feel like I am pulling you folks along

toward the road of reform, and I just wish we were working more

closely together trying to get to the same object, and that troubles

me somewhat, and I am concerned that the agency has become captive to the current system and is resistant to change.

As you heard Mr. McFarland say, the most troubling aspect of

the current FEHBP program is the utter lack of transparency, how

it is so opaque and so complex. We are not mapping the genome

here. We are selling pharmaceuticals to Federal employees. In my

other capacity on the Financial Services Committee, I am dealing

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with complex derivatives, currency to fall swaps, credit to fall

swaps, financial engineering that is increasingly and incredibly

complex. It pales in comparison to what we have going on here in

selling pharmaceuticals to Federal employees.

That is all we are doing here, and we have this construct that

is just mind boggling and mind numbing. I think that is exactly

why it was constructed the way it is, to resist change. It resists the

threat of being understood by its complexity. We are trying to drill

down and straighten this up. We need your help. We really do.

This current system, we have just got to blow it up and get rid

of it and get on to something else, because this is not working for

the American taxpayer. I think the estimate that Ms. Weaver has

put out there of several hundred millions of dollars in savings, that

is probably conservative, what I see here. I think it is probably closer to $1 billion what we can save. In

light of the difference in formularies that we pointed out here this

morning, what we are paying, we have 8 million participants and

we don’t use that collective clout, that buying power, at all in our

systems, and we allow these PBMs to really abuse what I think is

honorable service by our Federal employees. We are just letting

them take advantage of us, and we cannot do that any more. Our

budget will not allow it. So we have to find some savings, and if

we are looking for waste, fraud, and abuse, the FEHBP is a targetrich environment because of the arrangements that we have going

on here.

This stinks. If I was a hound dog, I would be pointing right here.

Here is where some savings are. Here is where some waste, fraud,

and abuse is going on and I know it, and we are trying to dig down

and get at it.

We can save the taxpayer a ton of money. We could bring a more

competitive model and better serve. We have wonderful Federal

employees. I am an advocate for Federal employees. They do wonderful work. They provide a valuable public service. We cannot let

this go on. This is just unacceptable. We can’t do this any more.

So I am really looking for your help. I know we have a new Director over there, Mr. Berry, who is on the right. He is part of the

solution. He is not part of the problem, he is part of the solution.

But we have some inertia over there. Inertia, at best, and then resistance, at worst, and we have to get at it.

Since I am the chairman and there are no other witnesses, I am

going to extend myself another 5 minutes.

Let me ask you, Mr. Boehm, you have been terrific on this and

you have a unique perspective. In terms of transparency, you addressed this in part in your original testimony about the concern

that has been raised by the PBMs that if people know what they

are paying for then prices will go up and it will destroy competition, but can you talk a bit more about your own experience, and

also about some of the protections in the bill so that this is not

publicly available information that would undermine their competitive advantage?

Mr. BOEHM. The argument, as I understand it, they put forth is

that if the information is publicly available that the competitors,

the manufacturers, and the other chains would actually increase

their prices because they would have more information available.

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It is a difficult argument to debate because it is not publicly available now. In many other industries I think we have seen transparency lowers costs, not raise it.

But rather than debate that particular topic, I think the most

important thing is you have provisions in your bill that make it

only available for OPM’s use. It is not posted on Web sites, so the

manufacturers can’t see what the deals are, so I don’t think there

is any risk in the way you have constructed your confidentiality

that it would be publicly available information.

And then I would question, even if it was publicly available,

whether that really would increase costs, because, again, I think

you can go through a number of retail markets. You can look at

computers on the Internet. You can look at cars as more transparent pricing information has been made available. Costs generally go down in those environments. But rather than debate the

economic principle, I think you can just protect them against the

disclosure of the information.

Mr. LYNCH. OK. Mr. Beck, you mentioned that your experience

in Texas, $260 million in 4 years. We have 8 million participants.

What is the size of the market there?

Mr. BECK. Mr. Chairman, I am not real sure. I know it is extremely large. I think that estimate is low. I agree with you. I

think that the estimate is a little short at half a billion. I think it

is over a billion.

Mr. LYNCH. Yes.

Mr. BECK. One thing I wanted to mention. Back in 2002 there

was a lawsuit brought by the FEHBP and I believe the mail carriers, I was reviewing it this morning, against Advance PCS, which

is——

Mr. LYNCH. Was that Mail Handlers?

Mr. BECK. Mail Handlers. Yes, sir.

Mr. LYNCH. OK.

Mr. BECK. Advance PCS, which is now no longer. It was bought

by CVS Caremark. And out of that was $179 million settlement. In

addition to that, there were provisions in the settlement that was

a 5-year requirement for transparency standards to be followed.

That has now expired. So basically, your legislation just extends

that Federal lawsuit settlement and puts it in legislation that has

to do with all PBM contracts.

Mr. LYNCH. Yes. Thank you.

Ms. Weaver, I think you mentioned some of this in your testimony about drug switching and the abuses. You laid out that very

cogent analysis between what folks were paying for that formulary,

the $9.99 comparison. Can you drill down that a little bit and

elaborate on that analysis that you came up with?

Ms. WEAVER. Absolutely. So essentially, what we did is we took

CVS’s generic discount program, which is a list of over 300 drugs

that they offer for $9.99. As everybody said today, it is very hard

to figure out what drugs cost, right, so you need a baseline to figure out if you are getting a good deal. So one of the reasons we

decided to look at this is this is a baseline. It is the walk-up price.

You pay $10 to join this program, and anybody can get access to

300-plus generic drugs for $9.99.

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So what we wanted to do was look at Blue Cross/Blue Shield’s

FEP program. It is the largest plan within the FEHBP. We can

compare the prices that the Government and those Federal employees are paying for every single one. We tested every drug on that

list. What we found, as I mentioned, was that 85 percent of the

drugs on the list cost the Federal Government or Federal employees—and/or, sometimes both. It depends on the cost structures—

more than that $9.99 price. So it was a little bit——

Mr. LYNCH. So the people with insurance are paying more than

the people without insurance?

Ms. WEAVER. Exactly, for 85 percent of the drugs on the list.

Mr. LYNCH. How wacky is that?

Ms. WEAVER. It is pretty wacky.

Mr. LYNCH. Yes. Unbelievable.

Ms. WEAVER. And we have heard from Federal employees that

actually don’t use their insurance when they go into a retail store

because they know that they can get a better deal. That is pretty

absurd, as well, because those people are paying premiums that are

supposed to give them prescription drug coverage.

Mr. LYNCH. Right. They are paying premiums.

Ms. WEAVER. It is really sad.

Mr. LYNCH. And the American taxpayer is paying 72 percent of

that plan, in addition to what the user is paying. So that is what

has me absolutely furious over what is going on here.

Mr. McFarland, I appreciate your work on this. This has been

tough, and you have expressed at earlier hearings your frustration

in being able to determine what we are getting for our money and

whether there is an advantage here being had by the Federal Employees Health Benefits Plan and its 8 million participants in our

arrangement with these PBMs. Is there anything that is not in the

bill that you think might help your position in terms of understanding what is going on behind the scenes and the real cost between all these relationships, the commissions, the rebates, and

that whole relationship between manufacturers and PBMs and

pharmacies, as well?

Mr. MCFARLAND. No, Mr. Chairman. I don’t think that there is

anything in particular that should be additionally placed in the

bill. I think it is very complete as it is. That doesn’t mean that

there might not be, after further deliberation, some more thinking

about add-ons. But at this point I wouldn’t say anything specific.

What we are dealing with, I think, your bill clearly covers.

If I can, let me make a point on something that was presented

to me earlier today when we were discussing, as we have been for

a few weeks, preparing for the testimony today.

Mr. LYNCH. Please.

Mr. MCFARLAND. This is just a little excerpt from the audit staff,

what they noticed after the large provider agreement was brought

into effect, I think in 2005, and that simply meant to us that we

were able then to get into those PBM contracts. But as it turned

out, it was only in a compliance mode. We still could not get to

where we needed to be with that large provider requirement. And

my understanding of large provider agreement was simply whoever

ends up paying at least 5 percent, then they would consider large

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provider. Of course, the prescription drugs, 25 or more percent. So

that was an easy identification there.

But here is what was given to me. This is from the audit staff.

We have noticed a distinct shift in how the PBMs have contracted

with FEHBP carriers. What we saw as pass-through pricing initially with administrative fees and rebates returned, did a complete

180 degrees. After the large provider agreement, the contracts became based on a percentage off of the average wholesale price for

the drugs, with no administrative fees charged and the PBM keeping most, if not all, of the rebates.

Because the drugs are priced off a percentage of AWP, our audits

consisted of verifying the price charged to the FEHBP; however, we

could not compare that price to the actual price paid by the PBM.

Mr. LYNCH. Right.

Mr. MCFARLAND. So it was just obvious——

Mr. LYNCH. Yes. I understand what they are doing there. The average wholesale price is a moving target. It means something different to everybody, so you don’t have a solid benchmark there by

which you can make that determination.

What we are actually looking for here is the actual price.

Mr. MCFARLAND. Yes.

Mr. LYNCH. How much the actual cost is and how much we are

being charged. That is all we want to know. We just want a fair

deal. That is all. And one we can understand on behalf of the people that we represent, and we can’t get there with the way this

thing is working right now.

Mr. MCFARLAND. Well, we presently receive confidential proprietary information from the PBMs as a data base on prescription

claims, and we protect that with our heart and soul.

Mr. LYNCH. Yes.

Mr. MCFARLAND. We make sure that is as safe as possible in our

particular environs. But then, on the other hand, they are saying,

‘‘But you don’t need to see our financial records, but we can give

you the personal identification information of our claims people.’’

So it is saying one thing and doing another.

Mr. LYNCH. That is right. That is exactly right. Some of the information that is being sold out there and marketed is quite detailed, so it is counter-intuitive that they can’t give it to you in a

form that you can use.

All right. I think you people have suffered enough. I want to

thank you on behalf of the committee. We have a lot going on here

today. As you know, there are a few major hearings going on here.

I want to thank you for coming before this committee and helping

us with our work. I would like the opportunity to continue to work

with you.

Look, I am not saying that our legislation is perfect. Not by any

means. That is why we are having this hearing and that is why

we are trying to get input from you. I think actually you have all

been helpful in making this legislation better. We appreciate your

testimony and your help with this. We are going to allow Members

who may have had questions to offer you inquiries that you will,

if you are willing, would have to have you respond in writing within 5 days if Members so choose. But other than that, I want to

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thank you for your attendance today and you are free to go. Thank

you.

Can we ask our third panel to come up?

Good afternoon. I am sorry if we have delayed you with the

length of the previous panels. I do appreciate your attendance here.

It is the custom of this committee to swear all witnesses who are

to offer testimony, so could I please ask you all to rise and raise

your right hands?

[Witnesses sworn.]

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

has answered in the affirmative.

As with the previous panel, we will offer a brief introduction before we ask witnesses to offer testimony.

Mr. Daniel Adcock is currently legislative director of the National

Active and Retired Federal Employees Association. Before going

outstanding that Association, Mr. Adcock worked for the House

Committee on Education and Labor’s Subcommittee on Employment Opportunities and its Subcommittee on Human Resources

and was an Executive Assistant to the Assistant Secretary for

Aging, Jeanette Takamura.

Dr. Jacqueline Simon is the public policy director for the American Federation of Government Employees [AFGE]. AFGE watches

over the rights of some 600,000 Federal and D.C. Government employees. An economist by training, Ms. Simon has worked to protect the interest of Federal employees at AFGE for over 20 years.

Ms. Colleen Kelley is the president of the National Treasury Employees Union, the Nation’s largest independent Federal sector

union, representing employees in 31 different Government agencies. President Kelley, a former IRS revenue agent, was first elected to the union’s top post in 1999.

I do want to add my condolences and that of the committee. We

understand, Ms. Kelley, the incident last week where your colleagues’ offices were attacked in Austin, TX. I am aware that your

organization suffered a loss of Vernon Hunter, a Social Security

Administration Manager who was killed in that attack in Austin,

so our prayers are with your members and especially the Hunter

family. I understand they had six kids, and I know that Mr. Hunter’s wife also is an IRS employee, as well.

Ms. KELLEY. Yes.

Mr. LYNCH. That makes it even more difficult, but we do offer

our condolences in that respect and we appreciate the fact that you

were down there helping with those employees. I know we had quit

a few injured, as well.

Mr. John E. Calfee is a resident scholar at the American Enterprise Institute for Public Policy Research who studies the pharmaceutical industry and the Food and Drug Administration. He previously worked at the Federal Trade Commission Bureau of Economics, and has also taught marketing and consumer behavior at

the Business Schools of the University of Maryland at College Park

and Boston University.

Mr. Larry McNeely is a U.S. Public Interest Group’s health care

advocate, advocating the organization’s Federal level advocacy,

communication, and organizing on health care reform. Mr. McNeely

lobbies Congress for legislation that will tame rising health care

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costs and offer consumers better choices in the health care marketplace.

As was indicated earlier, the little box there in front of you will

be green when you should be speaking, yellow when you should

think about wrapping up, and red when you should stop offering

testimony.

Mr. Daniel Adcock, you are now recognized for 5 minutes.

STATEMENTS OF DANIEL ADCOCK, LEGISLATIVE DIRECTOR,

NATIONAL ACTIVE AND RETIRED FEDERAL EMPLOYEES;

JACQUELINE SIMON, PUBLIC POLICY DIRECTOR, AMERICAN

FEDERATION OF GOVERNMENT EMPLOYEES; COLLEEN

KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION; JOHN CALFEE, RESIDENT SCHOLAR,

AMERICAN ENTERPRISE INSTITUTE; AND LARRY MCNEELY

II, HEALTH CARE ADVOCATE U.S. PIRG

STATEMENT OF DANIEL ADCOCK

Mr. ADCOCK. Chairman Lynch, I appreciate the opportunity to

testify. I am Daniel Adcock, legislative director of the National Active and Retired Federal Employees Association.

Two important issues to our membership are access to the latest

in pharmaceutocology technology and ways to manage the costs associated with life-saving and life-enhancing drugs.

Under the expected technological revolution in medicines, diseases that were once fatal or debilitating will become chronic and

manageable. Ailments once requiring surgeries or stays in hospitals or nursing homes will be treated by pharmacology at home.

Due to advances in human genomics, our medicines will now be

tailored to our own DNA. This means drugs will be more likely to

treat our ailments while mitigating side effects and drug interactions.

Many women suffering from breast cancer had been prescribed

tamoxifin have already been the beneficiary of this new age of medicine. This is only the beginning.

The medicine bottle cap may be able to tell your cell phone or

home computer where you mislaid the bottle or alert you if a child

or other unauthorized person has opened it. Your doctor’s office or

family member may be able to know if the bottle was opened and

your daily dose removed.

Then there is the pill, itself. Embedded in the very tablet there

is likely to be a computer chip to remind you or someone else that

you took the medicine and the correct dosage and whether it was

metabolized correctly.

The role the PBM will play in this evolutionary change will only

become more critical in providing access to cutting-edge drugs

while containing costs. Transparency and oversight will become

even more important. We can accept the cost of advanced drugs as

long as we can be assured that they are safe and effective and that

the process of pricing such drugs is fair. That is why NARFE is

particularly interested in guaranteeing that the savings achieved

by PBMs are passed on to enrollees. We are pleased that H.R. 4489

tackles this issue.

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We are heartened to see that the President’s budget emphasizes

and continues the responsibility of OPM’s Inspector General in auditing reprimand benefits and the role of PBMs. Hopefully, this

will improve the contract negotiation process, hold costs in check,

and ensure against fraudulent claims.

For the 2010 FEHBP contract year, OPM has now requested

more information from carriers as they contract with PBMs for

their services. Let us hope this brings further information to OPM

and the beneficiaries.

Drug pricing is very complex. With the processes that involve the

drug formulary and the choices between generics and brand names,

plus the costs associated with disease management and patient information. Although drug formularies can help to contain costs,

they can also prevent patients from getting the most efficacious

medication. For that reason we are glad that H.R. 4489 gives physicians the final say on which drugs should be dispensed.

Still, OPM is not alone in seeking greater transparency. In fact,

human resource professionals outside Government are developing

transparency standards to ensure the PBMs are sharing manufacturer rebates and negotiating the lowest possible cost of specific

drugs. This experience could be helpful to OPM.

It appears that some of what has been proposed in H.R. 4489

could be implemented under OPM’s regulatory authority. For that

reason, OPM could get a jump start on enhancing its oversight of

PBMs before H.R. 4489 becomes law and codifies the additional authority that would be provided to the agency.

Still, we strongly believe that nothing should be left to chance regarding OPM’s ability to access PBM information. For that reason,

we believe that transparency should ultimately be legislated.

As we continue to work with you on this important legislation,

NARFE would be interested in information from OPM or the Congressional Budget Office on cost savings, formulary development,

and administrative costs that might arise from such regulatory or

legislative initiatives. Beyond H.R. 4489 we believe that the

FEHBP plan should buy prescription drugs for enrollees at the discount mandated by the Federal supply schedule. However, if the

FSS were to be used, FEHBP plans must have the option of buying

off-formulary medications.

NARFE would also support your proposal to designate FEHBP

PBMs as subcontractors under Federal acquisition rules.

We commend you for your interest in fair prescription drug pricing in the FEHBP, and we look forward to working with you on

this issue. Your prescription for the future of our health insurance

program is a welcome addition, and we thank you for your effort.

[The prepared statement of Mr. Adcock follows:]

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Mr. LYNCH. Thank you, Mr. Adcock.

Dr. Simon, you are now recognized for 5 minutes.

STATEMENT OF JACQUELINE SIMON

Ms. SIMON. Chairman Lynch, thank you very much for the opportunity to testify today.

Focusing on the operations of pharmacy benefit managers is an

excellent place to begin improving the affordability of FEHBP,

since the costs they impose are a big cause of the program is continuously rising prices and its lack of affordability for so many of

our members.

Although AFGE strongly supports H.R. 4489, I would like to

focus my statement today on one provision of the bill that, if altered slightly, could have a significant impact on the cost of

FEHBP. Specifically, that provision involves limiting the prices

that PBMs can charge to FEHBP carriers. The maximum price for

prescription drugs in the bill it says would be an amount that is

equal to the average manufacture price for the drug as disclosed

by the manufacturer. However, given the size of FEHBP, AFGE believes that the Government and plan participants should receive

the full advantages of their purchasing power, and that means a

better bargain than average prices.

The PBMs may be currently charging FEHBP higher than average prices for drugs is unconscionable. AFGE supports a much

stronger pricing standard than that which is set forth in the proposed legislation. We would recommend limiting these prices to the

amounts provided for in the prescription drug price schedules used

by the Department of Veterans Affairs [DVA]. Alternatively, the

legislation could limit the maximum reimbursement to a ‘‘most favored customer’’ pricing model.

Technically, the General Services Administration [GSA], delegates authority to negotiate these prices and has done so for DVA.

There is no reason why the same authority could not be extended

to OPM with regard to FEHBP, but it would be far more efficient

for OPM to simply use the VA prescription drug pricing schedule.

We have heard the arguments from the organized pharmaceutical industry that extending statutory pricing schedules to additional Federal health care programs will result in higher prices

for all Government purchasers. They seem confident that no one

can or will expect pharmaceutical companies to accept lower aggregate profits.

AFGE believes that we should all call their bluff. Even if the

drug companies do succeed in raising prices for all Federal purchasers as the price of selling to all Federal programs at a uniform

price, it is likely that the Government will still save money.

FEHBP is large enough that a substantial decrease in its drug

prices could offset retaliatory price increases that the drug companies might try to impose.

A final concern involves pricing transparency, which has been

discussed a lot here today. AFGE believes that in order for the legislation to have meaningful price transparency, the requirements of

TINA, the Truth in Negotiations Act, should be applied to the program. Both FEHBP carriers and PBMs utilized by the carrier

should be required to make available to Government agencies all

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cost and pricing data relating to the purchase or reimbursement of

prescription drugs by these entities. They provide it to other Federal agencies in other contracting situations, and there is no reason

they shouldn’t be required to provide that same data in this context.

In addition, AFGE believes that the application of cost accounting standards should specifically be applied to the FEHBP carriers

and PBMs in order to ensure that accounting for the pricing and

reimbursement of prescription drug costs is performed in a uniform

and consistent manner.

The President’s fiscal year 2011 budget proposal indicates that

OPM’s Office of the Inspector General intends to develop its ability

to audit PBMs. The budget cites OPM estimates that prescription

drugs make up 26 percent of FEHBP’s costs and will total $11 billion next year. The benefits of more thorough auditing should be

substantial.

Requiring FEHBP carriers and the PBMs to adhere to the cost

accounting standards will give the OPM IG the tools it needs to

carry out these audits in a way most advantageous to taxpayers

and enrollees.

This concludes my testimony, and I would be happy to answer

any questions you may have.

[The prepared statement of Ms. Simon follows:]

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Mr. LYNCH. Thank you, Dr. Simon.

President Kelley, you are now recognized for 5 minutes.

STATEMENT OF COLLEEN KELLEY

Ms. KELLEY. Thank you very much, Chairman Lynch.

I am here on behalf of NTEU members who participate in

FEHBP and diligently pay their ever-rising premiums for health

insurance only to receive reduced coverage and higher co-pays and

coinsurance costs for their prescription drugs. We were very

pleased to participate in the subcommittee’s drug pricing forum

last September that aptly highlighted the incongruity in FEHBP,

a program with one of the largest enrollee pools of 8 million people,

as we have heard, yet one that gets the worst prescription drug

prices in Government.

H.R. 4489 takes a giant step forward in addressing the problems

of why OPM has been unable thus far to better leverage what

should be a significant advantage. According to OPM’s Inspector

General, as we have heard, the cost structures of the pharmacy

benefit managers in FEHBP are utterly non-transparent. Because

the contracts cannot be audited properly under the current system,

OPM does not have all of the information it needs to make any

substantive improvements. Common sense dictates that U.S. taxpayers, and especially FEHBP enrollees, who saw their premiums

rise roughly by 9 percent this year or 15 percent if they were a single enrollee in the popular Blue Cross/Blue Shield standard plan,

deserve better than that.

H.R. 4489 says if a PBM and carrier want to participate in

FEHBP, certain conditions need to be met. NTEU supports this approach and the accompanying goals of transparency and accountability.

A tentative transparency and accountability is increased disclosure. Just as the administration calls for greater disclosure in Government through information and data sharing by Federal agencies

and individuals, it is only fitting for these billion dollar private

companies who make a profit from Government business to become

more transparent through disclosing relevant information, as well.

If PBMs want to participate in FEHBP, they should be held accountable, as H.R. 4489 proposes to do.

Therefore, NTEU supports section 2(H) of the bill, which would

allow OPM to access information on arrangements that PBMs have

with manufacturers and pharmacies. The range of information that

OPM would have available through these kinds of disclosures

would include corporate-wide rebate reports, rebate allocation

methodology, benchmark pricing, and various fees at different

stages. These will all put the agency in a position to better do its

job. We are not advocating public dissemination of proprietary information, but we are advocating disclosure to OPM as needed so

it can monitor the Federal program.

We also support the bill’s approach to prescription drug rebates

in section 2(C) and believe the language could be clarified even further to improve FEHBP. PBMs were originally intended to handle

administrative functions associated with drug claims; now PBMs

negotiate for discounted drug rates and receive hidden payments

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and rebates from manufacturers, as well as other fees and payments from carriers.

Under section 2(C), with 99 percent of rebates and fees being returned to the insurance carriers, NTEU would also recommend additional clarifying language to ensure that the funds recaptured

will be dedicated to the FEHBP program and be used to keep enrollee costs down, as we understand, DOD’s Tri Care health plan

does. Under Tri Care, rebates are put back into the insurance program and the PBM receives an administrative fee for services.

NTEU also believes the consumers protections in H.R. 4489 are

a very positive step, the ones on drug switching and on selling

claims data and on timely explanation of benefits. The PBM does

not know what is best for patients, so the drug switching issues

should go away, and the only way that should be able to occur is

with appropriate medical input. We support an end to that practice.

Now, on selling claims, while we question the practice of selling

FEHBP claims data at all, at a minimum OPM’s concurrence

should be a part of that process.

On EOBs, FEHBP enrollees will benefit from this added disclosure of prescription drug costs, enhancing their ability to choose

the best plans for their needs.

Finally, NTEU would support adding language to H.R. 4489 to

provide a pilot test of statutory pricing. We have long believed that

OPM should investigate the possibility of buying prescription drugs

off of the Federal supply schedule, as we have heard that the VA

and Defense do. Their drug prices are substantially lower than

FEHBP. Ten years ago I testified before Congress in favor of a

small pilot that OPM had approved for the SAMBA health care

plan to allow access to the Federal supply schedule for its mail

order drug program. SAMBA argued it could save 3 percent annually in enrollees’ premium shares by directly buying from the Government. Overall savings would have been $2.4 million annually,

and that was back in 2000 dollars.

Despite OPM’s approval, the pharmaceutical industry, whose

profits 12 years ago were estimated at $26 billion, pulled out and

they refused to participate in the plan. NTEU would support a

demonstration project to examine hard numbers associated with

the direct purchase of drugs through the FSS and we would support adding a provision to H.R. 4489 to make that happen. I believe

this approach offers a real opportunity for cost savings.

I thank you for the opportunity to testify today and will be glad

to answer any questions.

[The prepared statement of Ms. Kelley follows:]

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Mr. LYNCH. Thank you.

Mr. Calfee, you are now recognized for 5 minutes.

STATEMENT OF JOHN CALFEE

Mr. CALFEE. Thank you, Mr. Chairman. It is a privilege to speak

at these hearings. The views I present are my own, not those of

any organization, including the American Enterprise Institute,

which does not take institutional positions on specific legislation,

litigation, or regulatory proceedings.

H.R. 4489 focuses on the role of pharmacy benefit managers

[PBMs], as we have heard, in Federal Employees Health Benefits

Plans. On the whole, the provisions of H.R. 4489 would do far more

harm than good for consumers and patients, and it would increase

health care costs.

This bill is based on the assumption that competition does not

work well in the PBM market. The facts belie this premise. Competition is vigorous and multi-faceted. Stand-alone PBMs compete

among themselves and also compete with retail pharmacies, large

health insurance plans, large employers, and even pharmaceutical

manufacturers, themselves.

In this highly competitive environment, employers and insurance

plans have negotiated a rich variety of PBM contracts that reflect

the specific preferences of the contracting parties.

Another indicator of vigorous competition is the fact that a detailed investigation by the FTC, the Federal Trade Commission,

found very little evidence of favoritism or self dealing on the parts

of PBMs, regardless of who owned the PBMs.

H.R. 4489 would force nearly complete transparency in the financial arrangements between PBMs and their partners. This would

be difficult to achieve. But if the legislation does bring this kind

of transparency, it would undermine the incentives of PBMs to negotiate discounts from pharmaceutical manufacturers. This has

been recognized by the FTC staff and by other economists.

H.R. 4489 would also require PBMs to pass on virtually all the

savings they realize from aggressive cost cutting. This would undermine the incentives to cut costs in the first place. This cost cutting comes primarily from negotiating rebates from pharmaceutical

manufacturers. Undermining these incentives would raise cost.

This adverse consequence of regulation has also been recognized by

FTC economists and by others.

H.R. 4489 would also establish price controls, which rarely, if

ever, does good in competitive markets. The prohibition on negotiating a spread between payments to manufacturers and to pharmacies would discourage PBMs from seeking to reduce drug prices

and costs. Giving OPM the power to set ceilings on pharmacy dispensing fees would require OPM to uncover the true costs and benefits of dispensing for pharmacies. This is not easily done, and it

could easily disrupt access or even increase costs.

H.R. 4489 would prohibit health plans from reimbursing more

than what is called the average manufacturer price [APM], and

OPM would be granted new oversight powers on drug pricing.

There is no reason to think this would reduce price directly, and

prices directly, because manufacturers can adjust prices outside of

the FEHBP system, but this measure could easily set the stage for

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direct price controls over pharmaceuticals, as we have already

heard. This would have extremely adverse consequences for researching and developing new drugs and new uses for approved

drugs.

H.R. 4489 would also impose restrictions on who can own a PBM.

This would tend to reduce competition. In addition, these restrictions would deprive the marketplace of the benefits of vertical integration. For example, ownership restrictions would sometimes add

extra steps in the pricing of drugs as they proceed through various

channels from manufacturers to patients.

H.R. 4489 would also expand regulation of drug formularies. Little, if any, evidence indicates that PBMs harm patients through the

design and operation of formularies. New restrictions are more

likely to raise costs than to improve health.

Finally, H.R. 4489 would grant OPM the power to prevent PBM

from selling information on drug utilization and sales. This would

be unfortunate. This kind of information can play an important

role in the larger task of improving pharmaceutical targeting and

use. And, again, there is little, if any, evidence of consumer harm

from these practices.

For all these reasons, I respectfully urge this committee to reconsider H.R. 4489. There is no reason to prevent employers, health

plans, and pharmaceuticals from negotiating whatever arrangements they wish with PBMs.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Calfee follows:]

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Mr. LYNCH. Mr. McNeely, you are now recognized for 5 minutes.

STATEMENT OF LARRY MCNEELY II

Mr. MCNEELY. Thank you, Mr. Chairman.

Mr. Chairman, members of the committee, I very much appreciate the opportunity to come before you today and testify about

this bill and its effort to control the cost of drugs in the Federal

Employees Health Benefits Program.

As I said, my name is Larry McNeely. I am the health care advocate with the U.S. Public Interest Research Group. U.S. PIRG, as

we call it, is a national federation of State-based consumer advocacy organizations. We have a 35-year history of standing up for

consumers, and we are convinced that both strong competition and

strong consumer protection are essential to the functioning of any

market. Unfortunately, the pathway for pharmaceutical delivery in

this country, the market for pharmaceutical benefit managers

[PBMs], lacks that adequate competition and it lacks the consumer

protections that are required, and that is why the reforms envisioned in H.R. 4489 are so necessary to help bring down costs.

In explaining the benefits of transparency, I think a lot has been

said in this panel and in previous panels. I just want to refer to

the comments of assistant attorney general for Antitrust, Christine

Varney, who highlighted its importance when she said: I am a firm

believer in what Justice Brandeis said in another context: Sunlight

is said to be the best of disinfectants; electric light the most efficient policeman. Markets work better and attempted harms to consumers are more likely to be thwarted when there is increased

transparency to consumers and Government about what is going on

in an industry. I could not say it better.

In my written testimony I go into more detail, but, just to outline

a couple of the essential points, if the three essential elements of

any competitive marketplace are choice, transparency, and a lack

of conflict of interest, the PBM market actually lacks each one of

those three. It is highly concentrated. We actually have some evidence which I detail in here of legal action to stop deceptive and

fraudulent practices. And we continue to see these practices of drug

switching and self-dealing, which are not only unfair to Federal

employees in this particular context, but are spread more broadly

across the health care market and we really think needs addressing in other legislation.

We believe enacting H.R. 4489 will lead to significant cost savings for taxpayers. The proposed legislation will actually lead to a

reduction in pharmaceutical costs by requiring the pass-through of

rebates and prohibiting the practices of drug switching and spread

pricing, and it will protect employees and taxpayers by preventing

conflicts of interest that we have run into in cases like CVS

Caremark, where a PBM is owned by a retail chain.

These assertions are backed up by a growing body of evidence

that demonstrates that plan transparency does allow plan sponsors

to monitor and curb their prescription drug spending. I detail a

number of examples, but in one case in New Jersey when they

switched to a pharmaceutical benefit manager contract that was

transparent for 600,000 covered employees, they are now projected

to find $558.9 million in savings over 6 years. If we are talking

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about 8 million Federal employees, certainly a substantial amount

of resources are available.

And just to sum up, I think our attitude and why we are, I think,

so grateful to the sponsors of this legislation for moving it forward

is that without the protection afforded in H.R. 4489 it is as if the

pharmaceutical benefit management industry is saying to taxpayers, saying to Federal employees, give us $10 billion of your

money and trust us. The PBM industry, as a whole, as we have

demonstrated in some of the lawsuits I detail in my testimony, has

not earned that trust, and we should make sure—I hope this legislation gets favorable consideration by the committee.

Thank you.

[The prepared statement of Mr. McNeely follows:]

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Mr. LYNCH. Thank you, Mr. McNeely.

I now yield myself 5 minutes.

I want to thank you all for your testimony. I really appreciate

your willingness to come before the committee.

Mr. Calfee, I have great respect for the American Enterprise Institute. They have long been advocates of good Government, I

think. I am a little puzzled. I know that you testified previously before the House Energy and Commerce Committee to the effect that

prescription drugs in the Medicaid program should more closely reflect cost.

Now, here in today’s hearing, you have heard both Republican

and Democratic Members express the frustration that we cannot

determine what the costs are of the drugs in the FEHBP program.

We have heard from the customers, the users, that they cannot determine what the costs are of the drugs offered in the FEHBP program. We have heard from the Office of Personnel Management responsible for oversight of the FEHBP program, that they, indeed,

cannot determine what the costs are of the drugs in the FEHBP

program.

We have heard from the Inspector General of OPM who says—

and he is principally responsible for the oversight here—that he

cannot determine what the costs are in the drugs for the FEHBP

program, and we even have an example of a program where 300

drugs are offered to the general public with no insurance, with no

insurance, and they are paying less money than insured individuals are paying through their pharmacy benefit managers in the

FEHBP program, which is funded on an average 72 percent by the

taxpayer, roughly 28 percent by premiums paid for by the individual.

Why would you support the principle that Medicaid drugs should

be as closely as possible priced based on cost, and yet your testimony here today seems to be at variance with that, if not directly

opposed to it.

Mr. CALFEE. You are referring to my own testimony in connection with Medicaid?

Mr. LYNCH. Yes.

Mr. CALFEE. I am trying to remember what I said, but I imagine

what I said was that Medicaid should pay market prices rather

than getting a special fixed discount from market prices. But they

should go out in the market.

Mr. LYNCH. You testified in 2005 before the House Energy Commerce Committee that says closely reflect cost.

Mr. CALFEE. By cost I was referring to market prices. Certainly

I was not referring to the cost of manufacturing the drugs, because

those costs are very, very small compared to any prices.

But my understanding, especially from the testimony of Mr.

O’Brien earlier today, is that all of these plans are free to reach

contracts with PBMs that do provide for disclosure. In fact, I believe that is what Argus Systems specializes in. And so my understanding is if a plan wants to have transparency, if they want to

have the rebates passed through to them, they can arrange for that

through contracts.

So I think the issue here is whether or not they have their freedom to either have a contract that does provide for transparency

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and pass-through rebates or to have a contract that doesn’t do that.

And what we have heard in the private sector outside of FEHBP

is you get both kinds of contracts. You get contracts with transparency, ones without, etc. The plans experiment with different

ones. Sometimes they save money from when they switch from one

approach to another, and sometimes they don’t.

Mr. LYNCH. But, sir, in this case we are the customer. I am a

Federal employee. I am an oversight officer on behalf of the Federal employees. It is not as if we said we want a contract with no

transparency. We are demanding transparency and we can’t get it,

nor can the Office of the Inspector General. We can’t get that

transparency. Nor can the Office of Personnel Management. We

can’t get that. The PBMs and the contracting parties are saying

that it is a matter of proprietary advantage and they don’t want

to disclose that.

So we have had instances where it has gone to court, in the State

of Maine example, where I think the heat of that litigation broke

the case open for the State of Maine, and that was a great advantage. But absent that urgency and the consent decree that was rendered in that case, that transparency would not be forthcoming.

So it is not like, oh, we’d prefer transparency or we would not

prefer transparency; we are demanding it and we cannot get it.

That is the truth of the matter here on behalf of everyone that I

mentioned, Republican and Democrat, so far.

Mr. CALFEE. Again, I know in the private sector outside of

FEHBP it is fairly common. It is not the rule, but it is fairly common. It does happen that a plan will have a contract for transparency, such as with Argus Systems that we heard about earlier.

But if you think about negotiating, a PBM negotiating with a

drug manufacturer, if it wants to get a discount on a certain drug,

and if that manufacturer knows that any discount he provides will

instantly be communicated through the plans to other drug manufacturers and the other manufacturer will probably offer to match

that price, then what the manufacturer knows during the negotiating process is there really isn’t much to be gained by the manufacturer by providing a discount because they will end up having to

give that discount to everyone.

So I think economic reasoning does suggest that if you force

transparency you can make these negotiations more difficult, discounting more difficult to obtain, and I think that is fairly close.

I wouldn’t call it a consensus, but I would say the bulk of economists follow that line of reasoning, including specifically the Federal Trade Commission and also the CBO.

Mr. LYNCH. I appreciate that, but I think we did hear testimony

here today, and in my bill specifically it is not requiring public dissemination of proprietary interests here. We are talking about you

need to tell the Office of the Inspector General for OPM. They already receive proprietary information. They guard that jealously.

In fact, if that information got out, it would hurt their credibility

enormously and effect negatively their ability to do their job. So

that is why we are suggesting it just be limited disclosure.

Let me go on, though. Mr. Adcock, I know that you mentioned

earlier the number of NARFE employees that are included under

the FEHBP program. Let me ask you, what is the general assessVerDate 11-MAY-2000 15:56 Oct 08, 2010 Jkt 000000 PO 00000 Frm 00171 Fmt 6633 Sfmt 6633 U:\DOCS\58135.TXT KATIE PsN: KATIE
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ment in terms of your own members’ attitudes toward the current

FEHBP program, specifically toward OPM’s oversight of prescription drug programs within the FEHBP?

Mr. ADCOCK. Well, I think it is kind of a love/hate relationship.

On one hand, I think that they are happy that they have health

insurance that is equivalent to what other large employers provide,

but I think they hate the fact that they are paying premiums in

the double digits for the last several years.

With regard to prescription drugs, I mean, I think they understand very clearly that is one of the huge cost drivers in the program and is responsible for huge premium increases. Now, I think

that over the years, because of the fact that several years ago they

were encouraged through cost sharing to start using mail order

prescription drugs and thereby pharmaceutical benefit managers,

they are now accustomed to doing that.

I think that where there are concerns that we hear most often

is that when we hear examples that individuals that don’t have

any insurance at all can go into a drug store and get a better price

on a specific type of drug than they can through the insurance,

that is troublesome to them. When they hear about that State Attorney Generals all over the country are involved with legal action

against pharmaceutical benefits, that is troublesome.

So, on one hand, I think that when you are talking about customer service that they have with pharmaceutical benefit managers and arranging for their drugs to be purchased, I think a lot

of these PBMs have very good customer service, but when they

hear about these stories they want to know what is going on behind the curtain. That is why I think for a lot of them they are

very interested in the subject matter of this legislation and transparency.

Mr. LYNCH. Dr. Simon, could I ask you the same question? I

know the American Federation of Government Employees has a

tremendous amount of employees affected, as well. What are the

attitudes? I don’t know if you are close to that level of feedback.

Ms. SIMON. I am, but I just want to say, especially in light of the

oath that we took at the beginning of the panel here, I never finished my dissertation so I am not Dr. Simon.

Mr. LYNCH. OK.

Ms. SIMON. But in any case——

Mr. LYNCH. All right. We won’t hold that against you.

Ms. SIMON. But thank you for the presumption.

In fact, AFGE is holding its annual legislative conference this

week, and during the issues briefing this weekend I don’t think

there was any subject that raised peoples’ hackles more than what

has been going on in FEHBP.

Mr. LYNCH. Wow.

Ms. SIMON. Part of that is because of the national health care reform bills that would impose a so-called Cadillac Tax on their

FEHBP plans, and I think today’s hearing shows that there is

nothing about the benefits that make it a Cadillac. It is the fact

that we pay too much. The price is too high, but the benefits aren’t

necessarily luxurious or comprehensive. And so, if that goes forward, they would get hit again for something that is completely beyond their control.

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We often, when we testify on FEHBP, note the fact that we don’t

know the number exactly, but there are at least a couple hundred

thousand, if not more, Federal employees who are eligible to participate in FEHBP but don’t participate and don’t have insurance

from another source because they can’t afford the premiums that

are on average now 30 percent for the enrollee, and they keep

going up.

And so, many of our members work in veterans’ hospitals or in

prisons and DOD medical facilities where they may be providing

these prescription drugs to inmates or patients, veterans, or patients in the DOD hospitals, and they know that the same Government that is paying for their health insurance through FEHBP is

paying one price if they were prescribed that drug and a completely

different price when they are dispensing it in a VA hospital or a

prison or through the Indian Health Service.

They are very, very aware of the fact that FEHBP has not been

run in a way that would minimize the cost to taxpayers or enrollees. And as it gets more and more expensive, and each year a higher and higher percentage of overall premiums is shifted onto the

employees, they are livid. They are livid. They are getting a small

pay increase and their FEHBP premiums are going up, up, up, and

they like this legislation.

Mr. LYNCH. OK. Thank you.

President Kelley, I know you have a pile of employees that are

also affected all over the place, right?

Ms. KELLEY. We do. We do, Chairman Lynch. But it does come

down to the single issue of the cost of the plan, because everything

points to the fact that these annual increases are so directly tied

to the cost of prescriptions.

I would also say that the forum that you held last September,

on this issue, for those who did not know about the Federal supply

schedule and the prices that were being paid so differently at DOD

and VA, they know that now and they have more questions about

why that would be allowed to continue to happen and why OPM—

the question has always been what OPM will do to better leverage

the 8 million enrollees. Of course, like I said, it always comes back

to the prescription drugs as the one element that is always pointed

to when the annual prices, the annual increases are announced

each year.

Mr. LYNCH. Let me ask you about that, then. We had this forum.

I guess I had an inclination to try to do the simplest thing, which

we have a Government purchasing system under the FSS, that

Federal supply schedule, and it is well known. It is well used. It

is established. It is used in general Government purchasing. And

it is fairly transparent. You put out there what you are going to

charge the Government for providing a certain material or service.

And it is competitive.

My thought was, rather than this very, very Rube Goldberg-type

construction that we have for Federal employees health benefits on

the pharmacy side, let’s just put it out there like we would for

widgets, and you offer your price to the Government and we accept

it or reject it. We can consider quality and level of service. Let’s

just do that. The PBMs were the loudest critics of that system because it would eliminate them from the whole process, basically.

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Now, that is a very crude solution to our problem. It simplifies

things, but I will take for granted that widgets are not the same

as pharmaceuticals being recommended by a physician for the

health care of that individual. There are some important differences there.

However, when you look at the VA system that is out there that

works pretty well, they have a fixed formulary, however, so there

is a more limited choice, although there are waivers under certain

circumstances.

How would your members respond to that if there was a fixed

formulary, because that is going to reduce, conceivably, it is going

to reduce some level of choice for some of these exotics or some of

these less commonly used pharmaceuticals? It is going to be a limitation on choice. How are they going to balance the likes and dislikes of a system that might have a fixed formulary but a much

lower price across the board?

Ms. KELLEY. I don’t know how they will react to change in general, but any kind of a positive change I think would be received.

But one of the things that NTEU has recommended is that this be

done as a pilot, that it not just be an across-the-board, because

then all of the benefits that we already know exist, such as the

transparency, for those who oppose it, it is already there. The obstacles that they are raising have already been overcome with the

use of the FSS.

Mr. LYNCH. Yes.

Ms. KELLEY. So let’s try it in a pilot and one or two of the plans

in the program and see exactly what kind of an impact it would

have and if there are other issues that are created that haven’t

been thought about.

Mr. LYNCH. Like I said, there are waivers or there are ways, if

something is not on the formulary, if you make a showing that this

is needed then there is a way to get around that, but it does put

sort of a gatekeeper on the formulary.

Mr. McNeely, you had some great testimony earlier on about

competitiveness and transparency. Are there items, as you look

from U.S. PIRG’s standpoint, that should be added to this legislation that we may have forgotten or that you might think would be

helpful?

Mr. MCNEELY. Yes, and we would be happy to work with you,

but we generally believe that there are some steps that are to be

taken to strengthen the consumer protections within FEHBP by establishing an ombudsman and some other measures which I would

be happy to work with the committee in terms of those suggestions.

Mr. LYNCH. Yes. An ombudsman in what respect? With appeals

to which body, the carrier, the pharmacy, the PBM? That is OK.

I am getting a little deep in the weeds here and I don’t want to

put you on the spot.

Mr. MCNEELY. OK. Thank you.

Mr. LYNCH. Are there any other matters that we have overlooked

here in terms of trying to—as I said at the outset, this legislation

is not etched in stone, and we have heard from all three panels I

think constructive recommendations that we could improve our bill,

and we are happy to do that. But are there other items? How about

the suggestion that was made by Representative Treat from Maine

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about importing a standard of fiduciary responsibility on the part

of the PBM to act as fiduciary on behalf of the plan, of the insured,

the participants? Any thoughts on that?

Mr. ADCOCK. Imposing a fiduciary duty on the insurance carrier

or on the PBM?

Mr. LYNCH. PBM.

Mr. ADCOCK. On the PBM. I guess I don’t know enough about

what kind of responsibilities that would involve and what the

checks would be in terms of the oversight on the employer to ensure that they were actually complying with those fiduciary duties.

I mean, obviously, as an employer you are a fiduciary or should be,

at least, a fiduciary of your health plan on behalf of your employees

and retirees, but I am not sure exactly how that would work with

a PBM.

Mr. LYNCH. I think what they are trying to get at is this: you

are hiring a pharmacy benefit manager to get you the best deal.

That PBM goes out there, negotiates a deal for you as your agent,

but, unbeknownst to you because of the way the system works

right now, they pocket part of the advantage that you paid them.

You have already paid them as your agent to go out there and get

a good deal. Then they get you a good deal, a great deal maybe,

but then they pocket part of the advantage and come back to you

and give you some measure less than what you paid them to get

you.

And so, that sort of gives a little bit of a snapshot on the problem

here, that these deals are all going on and you never know the real

cost. As Mr. Weiner testified, you never know what that bottomline cost was, but with a fiduciary responsibility it would make it

clearer that the benefits flow to you, that PBM is out there negotiating for your benefit as your agent, and it would require full disclosure of any advantageous relationship that they engaged in that

may be in contravention of your own interest.

Mr. ADCOCK. I guess my question would be is if there is such a

fiduciary duty what sanctions would be made against the PBM if

they breached that duty.

Mr. LYNCH. Well, there is a great deal of case law that has been

developed around the responsibility of fiduciary responsibility, and

I think that would all be imported. Those standards would be applied if we import the fiduciary relationship with respect to a PBM

and the people that you represent.

I just want to ask you each if you have anything that you would

like to add. We have a series of roll calls. I would rather be able

to dismiss the panel and adjourn the hearing than come back. I

think we are probably at that point anyway. You have suffered

enough.

Ms. Simon.

Ms. SIMON. I just would say very quickly I think that this idea

of imposing fiduciary responsibility on the PBM makes it even

more important that we would have the cost and pricing data that

would be triggered by application of TINA, the Truth in Negotiations Act. We would find out what prices they were charging to all

their customers and what the actual cost of production of these

drugs is, in many cases when you are buying drugs it is a sole

source contract, and that is what triggers the applicability of TINA,

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where you find out this data—again, proprietary data that would

be held by the agency, so it wouldn’t be made public, but it would

allow the Government to enforce this fiduciary standard on the

PBM. So either way we need this data. We need this information.

Mr. LYNCH. OK. Great. President Kelley.

Ms. KELLEY. I will be looking more at the Maine experience and

at that language, but it just seems to me that language on fiduciary responsibility would add to the transparency, which is the

goal of the legislation, and that would be an enhancement to it.

Mr. LYNCH. Yes. That is my reading, as well.

Mr. Calfee, please?

Mr. CALFEE. Yes. I would suggest that the most dangerous and

counterproductive part of this legislation is the pass-through. If you

say to a PBM we want you to go out and negotiate a really good

discount, negotiating discounts is not a straightforward thing. If

anyone can walk into a pharma firm and say give me a 25 percent

discount and they would give it to them, everyone would get the

discount. It is a tricky business.

If you say to the PBM, We want you to go out there and do all

this work and negotiating a discount and figure out these clever

things, working with formularies and so on, and then give all the

returns to us, you are not going to get any discounts.

What it really does is it puts the onus on the plan to negotiate

the discount. If they can do that, fine. Sometimes they can. But

sometimes they can’t.

Mr. LYNCH. OK. Mr. McNeely.

Mr. MCNEELY. Yes. I just wanted to weigh in on the fiduciary responsibility piece.

We would have to take another look at the Maine legislation, but

I think we are generally inclined to support that direction if that

is the direction the committee moves with.

Mr. LYNCH. Great. Thank you.

As you notice, we have several hearings going on at one time,

and I am going to leave the record open in case any of the Members have any questions for members of the panel.

I do want to thank you very, very much for your willingness to

come before the committee and help us with our work. This is

tough stuff, very complicated, but I think you are each in a position

that has a unique perspective, and it is very helpful to us in trying

to figure out what the intended and unintended consequences

might be.

I want to thank you for your testimony here. You are free to go.

This hearing is now adjourned.

[Whereupon, at 4:33 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Edolphus Towns and additional

information submitted for the hearing record follow:]

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