[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




                 FEHBP: OPM'S POLICY GUIDANCE FOR 2001

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE CIVIL SERVICE

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 13, 2000

                               __________

                           Serial No. 106-218

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                   U.S. GOVERNMENT PRINTING OFFICE
71-983                     WASHINGTON : 2001


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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                    Lisa Smith Arafune, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                   Subcommittee on the Civil Service

                   JOE SCARBOROUGH, Florida, Chairman
ASA HUTCHINSON, Arkansas             ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland       ELEANOR HOLMES NORTON, Washington, 
JOHN L. MICA, Florida                    DC
DAN MILLER, Florida                  THOMAS H. ALLEN, Maine

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                      Garry Ewing, Staff Director
                Jenifer Hemingway, Deputy Staff Director
                         Bethany Jenkins, Clerk
            Tania Shand, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 13, 2000....................................     1
Statement of:
    Flynn, William ``Ed'', III, Director, Retirement and 
      Insurance Service, Office of Personnel Management..........     5
    Gammarino, Stephen W., senior vice president, Blue Cross/Blue 
      Shield Association; Bobby L. Harnage, Sr., national 
      president, American Federation of Government Employees, 
      AFL-CIO; and Scott Nystrom, adjunct scholar, the Mercatuus 
      Center at George Mason University..........................    43
Letters, statements, etc., submitted for the record by:
    Flynn, William ``Ed'', III, Director, Retirement and 
      Insurance Service, Office of Personnel Management
        Information concerning per member costs..................    28
        Information concerning premium rate increases............    26
        Information concerning prescription drug costs...........    27
        Prepared statement of....................................     8
    Gammarino, Stephen W., senior vice president, Blue Cross/Blue 
      Shield Association, prepared statement of..................    46
    Harnage, Bobby L., Sr., national president, American 
      Federation of Government Employees, AFL-CIO, prepared 
      statement of...............................................    61
    Nystrom, Scott, adjunct scholar, the Mercatuus Center at 
      George Mason University, prepared statement of.............    81
    Scarborough, Hon. Joe, a Representative in Congress from the 
      State of Florida:
        Prepared statement of....................................     3
        Prepared statement of Colleen M. Kelley..................    31

 
                 FEHBP: OPM'S POLICY GUIDANCE FOR 2001

                              ----------                              


                         TUESDAY, JUNE 13, 2000

                  House of Representatives,
                 Subcommittee on the Civil Service,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:15 a.m., in 
room 2154, Rayburn House Office Building, Hon. Joe Scarborough 
(chairman of the subcommittee) presiding.
    Present: Representatives Scarborough, Morella, Cummings, 
and Norton.
    Staff present: Garry Ewing, staff director; Jennifer 
Hemingway, deputy staff director; Bethany Jenkins, clerk; 
Earley Green, minority assistant clerk; and Tania Shand, 
minority professional staff member.
    Mr. Scarborough. The hearing will come to order.
    I welcome everyone to this hearing and thank you for your 
interest in the Federal Employees Health Benefits Program 
[FEHBP].
    One of the most important duties of this subcommittee is to 
oversee this critical program. Approximately 9 million Federal 
employees, retirees, and their families rely on FEHBP for 
health care coverage. The program has been widely cited as a 
model employer-sponsored health benefits program and even as a 
model for reforming Medicare. The key to its success has been 
the affordable premiums and consumer choice that results from 
hundreds of health benefits plans competing for the business of 
individual employees and retirees.
    Even though it is an excellent program, the FEHBP, like all 
health care plans today, faces serious challenges. Premiums 
have risen dramatically over the past 3 years, and another 
substantial increase seems imminent for 2001.
    The purpose of today's hearing is to examine OPM's 
administration of this critically important program. We will 
examine the policies established in OPM's call letter for 2001, 
as well as several ongoing matters.
    I was disappointed to see in this year's call letter no 
retreat from OPM's practice of continuing to impose mandates on 
the FEHBP. In previous hearings, we have been warned that 
mandates drive up premiums. Though each mandate looks 
reasonable when considered in isolation, their cumulative 
effect is to increase program costs and deprive consumers and 
carriers of the flexibility to meet their needs while 
controlling costs.
    And once again, it appears that drug costs are major 
contributors to rising health care costs. As anyone who reads 
the newspapers knows, Congress is very concerned about rising 
drug costs. This subcommittee is no less concerned. But before 
either this subcommittee or this Congress rush to propose or 
approve a solution, I strongly believe we must first develop a 
complete understanding of the causes of this situation and the 
impact of possible responses to it. We must follow the 
Hippocratic oath and, ``First do no harm.'' We should not let 
short-run pressures lead us to embrace approaches that will do 
long-term harm to our employees and retirees by degrading the 
quality of health care coverage under the FEHBP.
    I now pass the mic over to my ranking member, Mr. Cummings.
    [The prepared statement of Hon. Joe Scarborough follows:]

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    Mr. Cummings. Thank you, Mr. Chairman. The subcommittee 
convened a hearing on the administration policy guidance issue 
in the Office of Personnel Management call letter. At the 
hearing for the 2000 call letter, we addressed the impact of 
President Clinton's executive memorandum mandating FEHBP 
compliance with the Patient Bill of Rights and the application 
of cost accounting standards to FEHBP contracts. While there 
are many new issues to address at this hearing, a few are 
reoccurring.
    This year's call letter reflects President Clinton's 
directive for mental health and substance abuse treatment 
parity in the Federal Employees Health Benefits Program and, to 
the maximum extent possible, a reduction in medical errors and 
enhanced patient safety in the program.
    Specifically, the 2001 call letter calls for health plans' 
coverage for mental health and substance abuse to be identical 
to traditional medical care deductibles, coinsurance, co-pays 
and day and visit limitations. To reduce medical errors and 
improve the quality of health care, FEHBP plans are required to 
report to OPM on their patient safety initiative, to educate 
and inform enrollees about safety, and to work with other 
health care providers to improve patient safety programs.
    I look forward to hearing testimony on both of these 
initiatives. Rising premium and prescription drug costs are of 
ongoing concern to the subcommittee. Last session I called for 
hearings on this issue. Federal employees have endured dramatic 
increases in their health care premiums for 3 straight years. 
The 9.3 percent FEHBP premium increase for 2000 was preceded by 
a 9.5 percent increase in 1999 and a 7.2 percent increase in 
1998.
    The increases in FEHBP premiums reflect what is occurring 
throughout the health care marketplace which, among other 
things, can be attributed to an aging population and an ever-
increasing prescription drug cost. Forty-one percent of postal 
and nonpostal FEHBP enrollees are over the age of 61. Given the 
aging Federal work force and the fact that older Americans are 
the largest consumers of prescription drugs, the Federal 
Government has a responsibility to all its employees to explore 
any and all avenues that may contain premium and prescription 
drug costs.
    Finally, I understand that there is some controversy over 
the application of cost accounting standards to FEHBP 
contracts. Cost accounting standards are designed to increase 
the uniformity and consistency for which cost accounting data 
is supplied by contractors to the government for the purposes 
of assisting in either negotiation, pricing, or administration 
of contracts. CAS are applied to all contractors that performed 
under negotiated cost-based pricing arrangements with the 
Federal Government in order to ensure that costs are properly 
allocated. Blue Cross and Blue Shield continues to raise 
concerns about the difficulties of implementing cost accounting 
standards on FEHBP plan contracts.
    The American Federation of Government Employees believes 
that FEHBP contracts should be subject to the standards so 
agencies can ensure the accuracy of bills submitted by 
contractors.
    I am looking forward to testimony from all the witnesses on 
all of these issues. I am particularly interested in your views 
on how to maintain premium and prescription drug costs. Federal 
employees are feeling the effects of these increased costs 
every day. With that, Mr. Chairman, I thank you.
    Mr. Scarborough. Thank you, Mr. Cummings. We have two 
votes, but I think we have time to hear Mr. Flynn's testimony 
so let me ask you, Mr. Flynn to come up. Mr. Flynn was 
appointed as Associate Director for Retirement and Insurance at 
the Office of Personnel Management in 1994. He directs the 
Federal retirement systems, and the Federal Employees Health 
Benefits Program and the group life insurance program, and in 
1999 President Clinton recognized Mr. Flynn with a 
distinguished senior executive award. He has been a frequent 
witness before this subcommittee and we welcome you back here 
today.
    Let me ask you to rise so we can administer the oath.
    [Witness sworn.]
    Mr. Scarborough. Mr. Flynn you may begin your statement.

STATEMENT OF WILLIAM ``ED'' FLYNN III, DIRECTOR, RETIREMENT AND 
       INSURANCE SERVICE, OFFICE OF PERSONNEL MANAGEMENT

    Mr. Flynn. Good morning, Mr. Chairman and Mr. Cummings. I 
want to thank you for your invitation to be here today to 
discuss our policy guidance to health plans participating in 
the Federal Employees Health Benefits Program. We are pleased 
to report that the Federal Employee Program continues to be a 
model employer-based health benefits program that owes its 
success to market competition and informed consumer choice. We 
remain committed to providing access to high-quality, 
affordable health coverage for Federal employees and retirees 
and members of their families.
    Our approach each year concentrates on desired outcomes, 
leaving as much flexibility as possible for individual plans to 
make specific proposals that will best serve their members.
    Today I would like to discuss our major initiatives for 
next year: mental health and substance abuse parity and 
reducing medical errors and improving patient safety. At the 
White House Conference on Mental Health last June, the 
President directed OPM to achieve benefit parity for mental 
health and substance abuse treatment in the Federal Employees 
Health Benefits Program. Next year all plans will provide 
coverage for clinically proven treatments for mental illness 
and substance abuse in a manner identical to coverage for other 
medical conditions. Deductibles, coinsurance, copayments and 
day and visit limitations will parallel one another under 
parity.
    Based on research by the National Institute of Mental 
Health and others, indicating a growing consensus on treatment 
protocols and the effectiveness of managed care delivery 
systems, we concluded that it is possible to expand access to 
care in an affordable way.
    A preliminary review of proposals for next year indicates 
that plans will use networks of providers extensively to 
deliver the parity benefit. Now, the degree of management 
within those networks will vary from plan to plan, as is 
typically the case. Most analysts familiar with the Federal 
Employees Health Benefits Program assume that parity might 
increase costs somewhere between 1 and 3 percent of the total 
premium. We will know that with certainty when our negotiations 
are concluded later this summer, but all of the evidence 
suggests that we will be well under the upper level of that 
range.
    Late last year, the Institute of Medicine report on medical 
errors riveted our attention on this topic. The President set a 
goal for the Nation to reduce preventable medical errors by 50 
percent over 5 years. We believe patient safety is a vital 
issue demanding priority attention from all of us. We are not 
imposing any unique requirements on health plans. We are, 
however, requiring their support of effective strategies that 
promote health care quality.
    These efforts will not result in any cost increases this 
year. We will require plans to advise us on error reduction 
strategies they currently have in place and to describe their 
future plans to strengthen their safety program and will 
publicize this information to our members this fall. We have 
asked plans to designate a person or an office to manage their 
patient safety initiatives.
    We are also encouraging plans to consider error reduction 
strategies endorsed by others such as the Business Roundtable's 
Leapfrog Group.
    We stress the importance of working with providers and 
others to implement systems that ensure patients receive 
appropriate services in optimal settings and that providers who 
employ sound practices are noted and rewarded.
    Finally, in 2002 we will require all plans to begin seeking 
accreditation from a nationally recognized organization that 
has incorporated patient safety standards into its 
accreditation requirements.
    Now, the call letter also provided guidance on several 
other issues, including sections on prescription drug benefits, 
and coverage for high-dose chemotherapy and autologous bone 
marrow transplants. The statement I have submitted for the 
record covers each of these topics and several others and I 
will be happy to answer any questions you may have about them.
    Finally, the budget for next year assumes an average 
premium increase of 8.7 percent. While useful for budget 
planning purposes, the actual amount will not be known until 
our negotiations have been completed at the end of the summer. 
The trends that we described last year continue to affect our 
program and those of other employers. While the summer's 
negotiations will yield the final result, I am not optimistic 
about the trends we continue to see. Last fall Director 
Lachance said these premium increases were unacceptable--she 
continues to feel that way--and that she intended to seek 
amendments to the current law to counteract them.
    We want the ability to set standards for health plan 
participation that will promote health care quality and cost 
effectiveness and we want authority to achieve economies and 
efficiencies of scale by contracting directly for selected 
benefits. A draft proposal to accomplish these objectives is 
currently under development within the administration, and when 
the internal clearance process is completed, we expect to 
transmit it to the Congress for their consideration.
    Mr. Chairman, that concludes my statement. I would be happy 
to answer any questions that you may have.
    Mr. Scarborough. Thank you, Mr. Flynn.
    [The prepared statement of Mr. Flynn follows:]

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    Mr. Scarborough. We will get back to you on those questions 
after our two votes. We will stand in recess for approximately 
15 minutes.
    [Recess.]
    Mr. Scarborough. While we are waiting for Mr. Cummings to 
come back, Mr. Flynn, I will ask a few questions and then we 
will give Mr. Cummings the same opportunity.
    I wanted to ask you first of all about OPM proposing to 
allow SAMBA to purchase prescription drugs for its mail order 
program off a Federal supply schedule at a discount. What is 
the status of SAMBA's access to the FSS for prescription drugs?
    Mr. Flynn. I expect, Mr. Chairman, that we will have 
resolved that completely within a matter of days. We do know 
that we have now reached a framework of agreement under which 
SAMBA will be able to access the Federal supply schedule for 
prescription drugs for their mail order program. Details of 
that are being worked out, but it would be a 2-year pilot 
effort. We look forward to seeing the results of that and 
whether or not the savings generated might be applicable to 
other carriers in the FEHBP.
    Mr. Scarborough. OK. So what is OPM's position regarding 
plan-wide access to the Federal supply schedule?
    Mr. Flynn. OPM's position is that we want to make sure that 
we get maximum savings on the drugs that we purchase on behalf 
of our members. Now, there are a variety of ways in which that 
might be done. Access to the Federal supply schedule gives us 
the opportunity to see some actual results in practice and to 
make a judgment about what ought to be done for the future.
    Mr. Scarborough. How much does the FEHBP program spend per 
year on prescription drugs?
    Mr. Flynn. In round numbers, it is $1 out of every $4. We 
have a $20-billion-a-year program, which means $5 billion each 
year goes toward prescription drugs.
    Mr. Scarborough. OK. For the past 2 consecutive years the 
law has exempted carrier contracts in the FEHBP from the 
application of cost accounting standards, and I was wondering 
is OPM currently devoting any resources or conducting any 
activities aimed at implementing these standards?
    Mr. Flynn. Well, Mr. Chairman, the activity that we have 
been engaged in within OPM, with representatives of the 
carriers, and with staff of the Cost Accounting Standards Board 
has been an effort to look at the generic standards that the 
board has created, and which are intended to apply to Federal 
contracts above a certain threshold, and look for ways in 
which, given their applicability to those Federal contracts, 
they might be adapted for use in the Federal Employees Health 
Benefits Program. That has been the focus of our effort, Mr. 
Chairman.
    Mr. Scarborough. Just for the record, I was talking to your 
good friend, Mr. Mica, going over to the vote. He sends his 
best. I don't know if he will make it here or not. He was 
complaining about the continued rise every year in the cost of 
the plan, and again he blamed the mandates for the increase. 
What did you say the increase was this year, 8.7 percent?
    Mr. Flynn. The 8.7 figure is what was included in the 
budget projection, President's budget for fiscal year 2001.
    Mr. Scarborough. What was it the year before that?
    Mr. Flynn. Last year it was 9.3 percent, and I believe 9.5 
the year before that. We will check that and make sure that we 
have it correct for the record.
    [The information referred to follows:]

    This year's average premium rate increase of 9.3 percent 
follows a 9.5 percent increase in 1999 and a 7.2 percent 
increase in 1998.

    Mr. Scarborough. Over the past 3 years, that cost has 
skyrocketed, close to 30 percent. Now, Mr. Mica, and I think 
myself and others, might say that the mandates which have been 
added add to that. What is your best explanation why you 
believe that the cost of this plan has skyrocketed close to 30 
percent over just the past 3 years? That certainly is a burden, 
obviously, on the working men and women that take part in the 
program.
    Mr. Flynn. Mr. Chairman, just as you and others find it 
unacceptable, we do as well. Emphatically so.
    Let me say to you that mandates, although I would tend to 
characterize them as objectives of ours as a purchaser of 
health benefits for an employed and retired population, have 
done very, very little to impact those increases over the past 
3 years. In fact, the increases have come about primarily from 
three areas. First, the aging of the Federal population that is 
covered, and you'll hear reference to this in testimony today 
from the Blue Cross and Blue Shield Association.
    Second, the combined impact of medical technology and 
utilization. And I include in that increases in the cost of 
prescription drugs. They have been running probably, on 
average, 20 percent a year for the past 3 or 4 years and, as I 
mentioned a minute ago, now account for $1 in every $4 in the 
program. And third, medical inflation in general. What we are 
experiencing in this program, while I don't want to resort to 
it as an excuse, is what other employers are facing as well.
    That is why we believe that it is so important to undertake 
some initiatives to get some handle on these premium increases 
so we can at least mitigate the rise and maintain an affordable 
program for the almost 9 million people who participate in it.
    Mr. Scarborough. I am not being combative here, I am just 
curious, would you think--and obviously you guys should know 
this, you should be looking into it--but have costs for private 
insurance programs across the industry shot up by 30 percent 
over the past 3 years?
    Mr. Flynn. Costs for private employer-sponsored programs 
are shooting up dramatically. It is very difficult, because you 
have a lot of apples and oranges and pomegranates and pears out 
there, to try and compare that to the Federal Employees Health 
Benefits Program and its statutory structure. But as a general 
rule, and I think you will hear it in testimony from others 
this morning, yes, they are.
    Mr. Scarborough. Are they going up at that rate?
    Mr. Flynn. They are going up at similar rates, Mr. 
Chairman.
    Mr. Scarborough. Mr. Cummings.
    Mr. Cummings. Mr. Flynn, I want to go back to the 
chairman's question with regard to the prescription drugs. You 
said, now $1 out of every $4?
    Mr. Flynn. That's correct, Mr. Cummings.
    Mr. Cummings. Has that percentage changed? In other words, 
3 or 4 years, were we still spending $1 out of $4?
    Mr. Flynn. That percentage has changed dramatically over 
the years, over the history of this program. There was a time 
when prescription drugs accounted for 3 to 5 percent of the 
total cost of the program. They now account for 25 percent. 
That was in the early eighties. I will check that for the 
record, but I believe that is pretty close.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T1983.019
    

    Mr. Flynn. Now, costs have increased for a lot of reasons. 
I think it is important to say that prescription drugs are an 
important component today in the healthiness of people who 
participate in this program and other health insurance 
programs. So they have increased in terms of cost and in terms 
of their proportion, but they have also had a very good impact 
in terms of the health of the population covered.
    Nonetheless, prescription drugs are the fastest growing 
component of the health care equation today, and they challenge 
us to look for ways in which we can do appropriate actions to 
mitigate those rises because they are making premiums 
unaffordable for some people.
    Mr. Cummings. It seems to me that we do have a major 
problem, because when you look at the fact that you've got--
retirees get basically the same benefit, right?
    Mr. Flynn. Yes, sir.
    Mr. Cummings. So in other words, the government pays the 
same percentage?
    Mr. Flynn. Retirees participate fully in the FEHBP. When 
they turn 65, Medicare becomes their primary insurer and the 
FEHBP becomes the secondary; but the package of benefits is the 
same.
    Mr. Cummings. So you have a situation where people are 
retiring, they are getting older and it makes sense for them to 
stay in the program. With the way medical costs are these days, 
I don't see--I guess you have about 99 percent people staying 
in the FEHBP program?
    Mr. Flynn. Not quite that high, Mr. Cummings; 85 percent.
    Mr. Cummings. That is still high. So you have an older 
population. You have got a population that also probably needs 
prescription drugs more. Have you looked at what point--is 
there a line where, say, people if they get over 65--have you 
ever done any analysis like that? Where you see where a large 
chunk of that prescription drug money is spent? Is there a 
certain age, or is it spread throughout? I would guess that it 
would be more for older people.
    Mr. Flynn. You are correct. We have seen presentations from 
our health plans. We have looked at data and our actuaries have 
analyzed that as well. There is a curve and the curve begins to 
increase at a more rapid rate as one ages. It is just a natural 
function of the aging process, yes, sir.
    Where that line is particularly, I couldn't say; but I 
would certainly be glad to come back to you with some 
information that might shed some light on that.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T1983.020
    

    Mr. Cummings. I was talking to Mr. Mica, too, and he was 
talking about this whole thing of mandated benefits, and I 
think the chairman talked about it briefly. But when you 
answered the question, you said it is not the mandated 
benefits?
    Mr. Flynn. No, sir.
    Mr. Cummings. So when I add up everything that we have 
talked about in the last 4 minutes, how do you bring the 
premiums down? It seems like it is a rocket going up and to try 
to push it back down is going to be kind of difficult because 
it seems like it is something that is already in motion.
    Mr. Flynn. I don't think that you bring premiums down. I 
don't think that is the case. I think what we have to find a 
way to do is make the rate of increase in premiums more 
moderate through the use of things that other private employer-
sponsored health plans have done. It has been demonstrated that 
plans that offer high quality do so cost effectively. Let's 
look for ways to use the purchasing power of the program at 
large as opposed to broken up into 280 or 300 parts to get the 
best value possible for the Federal employees and participants. 
Those are tools that can bring the rate of increase down.
    But consider we are a very large health program--we have 9 
million people. But, when you figure there are 250 million 
people in the United States we represent only 3 to 4 percent of 
health care consumers. So, we are part of the equation but we 
are not the driving part of the equation.
    Mr. Cummings. Mr. Harnage, the president of the American 
Federation of Government Employees, he is going to get up here 
in a few minutes and he is going to be concerned about the role 
that the union folks have played in this process. If you will 
recall, the last hearing we talked about the role of the union. 
And if I remember correctly, you said that you welcomed their 
participation because you thought it was important. I am just 
wondering, has OPM taken to include employee organizations in 
the benefit design and the administration of FEHBP?
    Mr. Flynn. Mr. Cummings, I also recall that testimony from 
last year, and we have taken a number of steps to bring, not 
only AFGE and some of the other unions that represent employees 
which participate in this program, but the National Association 
of Retired Federal Employees as well, into our discussions 
about how we can make this program better. I think that we have 
made an honest substantive effort for that to occur. I will let 
Mr. Harnage speak for himself. I think he would like to see 
even more, and I understand that.
    I will do the best I can to make sure that their members 
and others are involved as we move this program forward.
    Mr. Cummings. Do you think that they have had any impact on 
what you have done at all? I'm just curious.
    Mr. Flynn. They and others have done two things that I 
think are helpful. They have kept us focused on the issue of 
the impact of rising health care costs on Federal employees and 
the ability of the Government to get its work done. That is a 
very important thing to keep right in front of us.
    The second thing that they have done is they have come to 
us with ideas for helping to mitigate the impact of this on 
Federal employees. This October 1 we will implement a premium 
conversion plan for Federal employees across government. That 
means that they will be able to pay their share of the health 
insurance premium with pretax dollars and the effect of that 
will be to put an average $434 into the pocket of every Federal 
employee who participates in the Federal Employees Health 
Benefits Program. That came to us from those organizations and 
will have that kind of an impact. So yes, they have been very 
helpful.
    Mr. Cummings. Finally, sometimes when we sit in these 
hearings we wonder how much people do talk; in other words, 
people who need to talk, like you and Mr. Harnage and others. 
It sounds like you are having some good discussions. Is there 
any--and so I am going to do a little facilitating here. Is 
there anything that they can do that would help you? It is in 
their interest to help you help their employees. Is there 
anything that they can do that you can think of that they are 
not doing that can help you in trying to accomplish all of the 
things that you just talked about?
    Mr. Flynn. I certainly can't speak for the organizations. 
The point that I want to make is--and I appreciate your efforts 
at facilitation--I want to be regularly at the table with them 
so that as they have ideas we look at ways in which we can make 
them come about when we and they agree that they make sense and 
can have a beneficial impact on this program. I will pledge 
that we will continue that, but I don't have anything specific 
in mind right now.
    Mr. Cummings. I just wanted to make sure that they are 
doing their piece. It is one thing for Mr. Harnage to come up 
here and say things are not working out. I want to make sure if 
you have something to say about him, you might as well say it 
while you are a few feet apart. I wouldn't want you to leave 
and----
    Mr. Flynn. No, Mr. Cummings, believe me, we appreciate not 
only in this area but in all areas, the advice and suggestions 
that AFGE and others bring to the table.
    Mr. Scarborough. Thank you, Mr. Cummings. And Mr. Cummings 
is available for marriage counseling and mediation for any 
legal cases in the District of Columbia and Maryland after 
hours.
    Connie, if you can give us an opening statement--and I 
would like to ask unanimous consent that the statement of 
Colleen Kelley, president of the National Treasury Employees 
Union be included as part of the record.
    [The prepared statement of Ms. Kelley follows:]

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    Mrs. Morella. Thank you, Mr. Chairman. I appreciate your 
holding this oversight hearing to discuss the administration of 
the Federal Employees Health Benefits Program. I know that all 
members of this subcommittee will concur that the best possible 
health care for our Federal employees is among our highest 
priorities.
    This year's policy guidelines as outlined by OPM emphasized 
several initiatives that I believe are essential to maintaining 
and improving the FEHBP. The first mandate by OPM is to 
stipulate that mental health and substance abuse parity be 
achieved by the 2001 contract year. I want to applaud this 
initiative and OPM's very direct involvement in crafting it. In 
fact, I recently held a meeting with representatives of the 
Washington Psychiatric Society, SAMHSA, the AMA, IMH, the 
American Psychological Association, and OPM. And Mr. Flynn was 
there and his colleagues to discuss the implementation plan.
    The goal of the meeting was to ensure that parity is 
incorporated in the most effective and seamless way possible 
and that all of the participants--they felt while certain 
changes should be made, the overall plan was sound.
    In addition, I want to applaud the decision by OPM to 
demand patient safety initiatives to reduce medical errors. The 
data from the November Institute of Medicine report showed that 
anywhere between 44,000 and 98,000 lives are lost each year to 
medical errors. This number is obscenely high. I know that 
several Members of Congress have drafted bills to remedy the 
situation, myself included, and I champion any efforts to 
diminish the accidental loss of lives in our hospitals and with 
our health care providers.
    There are two areas that I am concerned about and that I am 
pleased that this committee will address. The first one was 
brought up last year, involving the premium increases in the 
FEHBP, and some discussion has ensued on that this morning. As 
I noted last May, premiums in private employer-sponsored health 
plans have risen at a slower rate in the past, and we want to 
make sure that our Federal employees are not paying 
unnecessarily high premiums, and I note, Mr. Flynn, that you 
said it is about the same. I think it is maybe a little higher.
    I also want to ensure that the autologous bone marrow 
transplants for breast cancer are not hindering use of more 
effective breast cancer treatments. I know that OPM's goal is 
to bring about the most positive outcome for enrollees and I 
hope that this hearing will allow us to come to an agreement on 
how to best treat the most serious episodes of breast cancer. 
Those are some of the points that I wanted to bring out.
    In the line of questioning, if I could have permission to 
ask just a couple of questions, one has to do with the 
prescription drugs, which has been mentioned, and it is 
something that we hear about all the time, Members of Congress 
taking constituents over to Canada to buy those prescription 
drugs, and we look to the Federal Government to being a real 
model.
    I am curious; has OPM looked into doing some of that hard 
negotiating that has been done through the Veterans 
Administration for the very best price of prescription drugs 
and some of our other Federal entities? Are we doing anything 
in that regard, Mr. Flynn?
    Mr. Flynn. Mrs. Morella, I mentioned just before you came 
in, we will have our SAMBA health plan gaining access to the 
VA's prescription drug schedule for a pilot period in an 
evaluation to determine whether something like this would make 
sense for the balance of the plans that participate in the 
Federal Employees Health Benefits Program.
    There are a number of other things that we and our 
participating health plans are doing to try to attack, confront 
directly, the issue of the rising costs of prescription drugs. 
We have undertaken a number of cost-containment initiatives in 
past years. The institution of pharmacy benefit management 
programs and the encouragement to use generic drugs when they 
are therapeutically equivalent to brand names are examples of 
discounts that currently exist on prescription drugs in the 
program. Clearly we need to do more.
    You will hear also this morning from the Blue Cross and 
Blue Shield Association about some of the things that they have 
underway. Those are the kinds of things that we think are 
necessary. We want to always be careful, however, as we seek to 
control these costs, that we don't do so in ways that simply 
move or shift costs onto participants in the plan who have no 
other real alternatives. So it is a balancing that takes place 
here.
    But these are the kinds of things that have been done. They 
are the kinds of things that are underway now. And we are 
looking at ways in which we can use the purchasing power of 
this program to get the best discounts and prices possible.
    Mrs. Morella. I hope that you will share that with us 
because I think it is important that we are focusing on this, 
and again the Federal Government is considered to be exemplary 
in this regard.
    I am curious, whatever statistics you discern with that 25 
percent increase, whether it is people living longer and taking 
more drugs, and maybe having more prescribed, maybe more money 
going into research. I think it is kind of an interesting area 
for us to pursue as much as we can.
    My final question has to do with medical errors. As you 
probably know, I have legislation in that would not mandate but 
very strongly urge all health care providers to be involved 
with a data base which would be confidential; the information 
would not be subject to subpoena or discovery in any 
administrative or civil proceeding. You discuss working with 
networks to implement accountability systems. I know that you 
don't necessarily want to mandate specific provisions for 
reducing medical errors, but are you also concerned about the 
lack of accountability--or that accountability systems could be 
too punitive and prevent and discourage the reporting of 
medical errors?
    Mr. Flynn. Mrs. Morella, we don't want to do anything that 
would be perceived to, or would in fact, drive reporting of 
medical errors underground. And I think some of the kinds of 
things that you've talked about in terms of the punitive 
aspects may do that. This is a very important area when you 
think of medical errors and how to deal with them. It is not an 
area that is something that we mandate or control in the 
Federal Employees Health Benefits Program--and if I can just 
use that as a jump-off point to talk about our approach.
    Our approach in this area was to recognize that this is an 
issue that affects the entire health care system, and that if 
we were to do things that are unique or that are very 
prescriptive, we could actually thwart the ability to address 
the serious issues of medical errors in a way that makes sense 
across the entire system. So our approach was to say that what 
we expect health plans to do is to cooperate in that national 
effort and, as part of that cooperation, to give us information 
that we can then in turn provide our participants, the Federal 
employees, retirees and family members, to help them to choose 
health plans. And that information then could be made available 
to other health plan members conceivably.
    But we didn't want to overlap any efforts that were going 
on in other areas. For example, the National Quality Forum is 
addressing this area. A number of groups I mentioned, such as 
the Leapfrog Group of the Business Roundtable, are looking at 
promoting computerized physician order entry systems for 
prescription drugs, evidence-based hospital referrals for 
certain kinds of procedures and intensive care specialists in 
intensive care units. We think that these make sense and people 
ought to know about them when they make choices about their 
health care.
    There is a requirement which will go into effect in 2002. 
Beginning in that year, all Federal employee health plans need 
to seek accreditation from a national organization which 
incorporates patient safety standards into their accreditation 
process, and that is where some of that accountability comes 
in. We think that makes a lot of sense.
    Mrs. Morella. The idea is to urge hospitals and health care 
providers to report what their errors are and receive in turn 
the incentive to be able to correct them in the future, and I 
am glad that you are proceeding in that particular regard. I 
know that there are a lot of companies that are coming up with 
remedies. I saw one recently, a machine to help with 
prescriptions, and I think it is an important issue. Thank you, 
Mr. Chairman.
    Mr. Scarborough. Thank you, Mr. Flynn. We certainly 
appreciate your patience answering the questions and look 
forward to seeing you again soon.
    Mr. Flynn. Thank you.
    Mr. Scarborough. I would like to call up the second panel. 
We have Stephen Gammarino, Bobby Harnage, and Scott Nystrom. 
Mr. Gammarino is senior vice president for the Blue Cross and 
Blue Shield Association. He has extensive experience in health 
care administration and is responsible for the planning and 
direction of the Federal Employees Program, serving almost 4 
million enrollees. Mr. Gammarino has been a frequent witness 
before this committee on FEHBP issues and we certainly 
appreciate his efforts.
    Bobby Harnage is the National President of the American 
Federation of Government Employees. AFGE represents more than 
600,000 Federal and District of Columbia employees, and this is 
Mr. Harnage's second appearance before this subcommittee and we 
appreciate your time and efforts here and look forward to 
hearing AFGE's views.
    Scott Nystrom is an adjunct scholar at the Mercatus Center 
at George Mason University. Dr. Nystrom served as a senior 
policy adviser to the Bipartisan Commission on Entitlement and 
Tax Reform chaired by Senators Bob Kerrey and John Danforth. He 
has worked on the Hill as budget associate senior legislative 
assistant at the House of Representatives and at the Office of 
Personnel Management, analyzing health issues among others. 
This is Dr. Nystrom's first appearance before the subcommittee 
and we certainly welcome him also. If you all could stand I 
will administer the oath.
    [Witnesses sworn.]
    Mr. Scarborough. We will begin with you, Mr. Gammarino.

STATEMENTS OF STEPHEN W. GAMMARINO, SENIOR VICE PRESIDENT, BLUE 
CROSS/BLUE SHIELD ASSOCIATION; BOBBY L. HARNAGE, SR., NATIONAL 
  PRESIDENT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-
 CIO; AND SCOTT NYSTROM, ADJUNCT SCHOLAR, THE MERCATUUS CENTER 
                   AT GEORGE MASON UNIVERSITY

    Mr. Gammarino. Mr. Chairman, good morning and thank you for 
the opportunity to appear before you today to comment on the 
Office of Personnel Management's policy and guidance for 2001. 
What I would like to do is summarize my written testimony. I 
would like to submit the testimony for the record.
    In your letter of invitation, you requested our views on 
how various proposals and recommendations contained in the 2001 
call letter would affect the costs and quality of health care 
coverage offered through the FEHBP and any other issues that 
are important to Blue Cross and Blue Shield Service Benefit 
Plan. In addition, you requested that I discuss efforts by Blue 
Cross and Blue Shield to restrain prescription drug costs.
    As a general rule, Blue Cross and Blue Shield Association 
opposes Federal mandates and believes that they have a long-
term adverse effect on the ability to provide affordable health 
care coverage. However, the level of impact can vary 
significantly depending on the degree of flexibility afforded 
the health plans.
    My testimony today will focus on two major initiatives 
prescribed in OPM's call letter: the first, achieving mental 
health and substance abuse parity; and the second, improving 
the quality of health care by reducing medical errors and 
increasing patient safety.
    Blue Cross and Blue Shield has worked closely with OPM to 
develop and enhance the mental health substance abuse [MHSA] 
benefits. We have appreciated OPM's ongoing involvement of the 
carriers and leaders in the managed behavioral health care 
field to better understand the implications of this enhanced 
benefit for the program. In order to comply with this mandate 
and control the benefit and administrative costs associated 
with it, we are developing a benefit proposal that utilizes a 
care management strategy. The Service Benefit Plan intends to 
buildupon existing local Blue Cross and Blue Shield plans' 
managed behavioral health networks. We are prepared to work 
closely with the agency to ensure that enrollees use benefits 
in the context of a care management strategy designed to 
promote the appropriate use of those benefits.
    Additionally, it is unlikely that we will know the true 
cost of this benefit for 3 to 5 years as it will take time for 
members and providers to understand the program and for the 
inherent delivery patterns to change.
    The second initiative is patient safety. Patient safety is 
a critical and sensitive problem that demands the respect and 
attention of all stakeholders. We support the President and the 
agency's initiatives to reduce medical errors and increase 
patient safety in all health care settings. However, it is 
important to understand that it is the physician and the 
hospital communities, not the local health plans, who must 
devise the clinical strategies to address patient safety 
concerns. The primary role of the local plan like the FEHBP 
Blue Cross and Blue Shield must be to respond to physician and 
hospital initiatives, and to then support their needs with our 
own resources.
    We are committed to working with providers, independent 
accreditation agencies and others to implement patient safety 
programs. Blue Cross and Blue Shield Service Benefit Plan has 
developed and shared with OPM a number of initiatives that 
focus on improving health quality and patient safety.
    In the letter of invitation, the subcommittee also asked us 
to focus on prescription drug cost trends and how prescription 
drugs have contributed to the overall costs of health 
insurance. Making drug coverage affordable to our members and 
keeping premiums stable continues to be the one most difficult 
challenging initiative facing our program.
    Prescription drug cost trends continue to be nearly three 
times greater than our other trends in other areas, and 
currently our program spends about 30 percent of our premium 
dollar associated with drugs. These cost trends continue to be 
driven by the rapid development of new, expensive drug 
therapies which substitute for less expensive existing 
therapies, rising prices for existing drugs, and heightened 
demand and utilization of prescription drugs fueled by the ever 
expanding direct-to-consumer advertising.
    It is important to realize that this program is dealing 
with an aging population. The average member in the FEHBP is 54 
years old. And the average member in the Blue Cross and Blue 
Shield standard option is 60. Data has shown that the quantity 
of medical resources and specifically prescription drugs 
increases as individuals age.
    It is also important to understand that these trends are 
not dissimilar to those experienced industry-wide. In addition 
to the Service Benefit Plan's numerous initiatives, we are also 
focusing on a number of other areas from the Association's 
perspective. As part of this effort to restrain prescription 
drug costs, the Association, that is Blue Cross and Blue 
Shield, is a founding member of the RxHealth Value Coalition, a 
coalition of 30 consumer groups, private employers, purchasers, 
providers, labor unions and others that seek to ensure credible 
analysis is done to ensure that these drugs provide value to 
the community.
    In addition, we have also launched an independent not-for-
profit pharmacy evaluation program known as Rx Intelligence. 
This is scheduled to become operational June 30. It will be an 
independent company designed to alert employers, insurers, and 
consumer groups to new drugs nearing regulatory approval. It 
will provide quick analysis of these medicines once they are on 
the market and conduct indepth reviews and cost benefit 
analysis of these new and existing drugs.
    Additionally, your letter asked that we address any other 
important issues. We remain concerned about the 
administration's continued efforts to impose cost accounting 
standards on the FEHBP. Blue Cross and Blue Shield Association 
has actively sought exemption for the past 2 years, after an 
exhaustive analysis determined that the cost accounting 
standards are fundamentally incompatible and inappropriate for 
our health insurance system. Despite the clear will of Congress 
and the overwhelming strength of the arguments against imposing 
these standards, the administration continues to oppose this 
exemption. Applying CAS will not only not add value to the 
program, it would degrade the commercial capabilities on which 
our plans' core business depend.
    Therefore, as I have testified before, Blue Cross and Blue 
Shield cannot sign any contract with the agency that contains 
the CAS clause or otherwise seeks to implement these standards 
which have been exempted by law.
    In conclusion, the Federal Employees Health Benefits 
Program is widely admired throughout the country as a model of 
efficiency and effectiveness due to the private sector 
competition and consumer choice. Blue Cross and Blue Shield is 
very proud of the role that the Blue Cross and Blue Shield 
plans have played in helping to make this program as successful 
as it is today, and we look forward to finding ways to preserve 
and improve the strength and stability of the program for 
Federal workers and their family members. Thank you.
    Mr. Scarborough. Thank you, Mr. Gammarino.
    [The prepared statement of Mr. Gammarino follows:]

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    Mr. Scarborough. Mr. Harnage, welcome back and we certainly 
look forward to hearing your testimony.
    Mr. Harnage. Mr. Chairman and subcommittee members, I have 
submitted my written testimony and I ask that it be entered 
into the record.
    A year ago, this committee held a hearing to examine the 
source of what was then a 2-year run-up in FEHBP premiums that 
infuriated our Members and many members of the subcommittee. 
Well, here we are again, 1 year later, and many millions of 
dollars poorer, as premiums in FEHBP again rose by over 9 
percent this year. Again, Federal workers are seeing their 
hard-won pay raises eaten up by the health insurance premiums.
    Since last year's hearing, OPM and AFGE have been engaged 
in some dialog regarding the administration and pricing of 
FEHBP, but this dialog has fallen far short of the relationship 
we want. We still pay roughly a third of the $18 billion annual 
cost of FEHBP, not counting the out-of-pocket copayments and 
deductibles; yet OPM maintains that only it has the right to 
make decisions on how the entire $20 billion is spent.
    We contend that our $6 billion of financial responsibility 
should come with a voice on how the money is spent. There is no 
good reason why 6 to 7 billion out of pockets of Federal 
employees does not justify a seat at the table so that we can 
represent our own priorities and raise our own questions in 
negotiations with health insurance companies.
    On behalf of the more than 600,000 Federal and District of 
Columbia workers AFGE represents and for whom the health 
benefit plan is the only reasonable choice, I ask the 
subcommittee to affirm that workers' voices should be heard in 
the annual negotiations over the terms of the health benefit 
contracts.
    I want to say in the strongest possible terms that we do 
not believe that OPM speaks for us. Each year brings new 
evidence that our interests are not well represented by OPM. 
There has been no slowdown in premium inflation. The insurance 
companies are increasingly emboldened to press for less 
scrutiny of their contracts, fewer restrictions on benefit 
design, no restraint on how they obtain or what they charge for 
prescription drugs, and of course a blank check at the premium 
setting.
    Following tradition, OPM again refers to the insurance 
companies as its partners in this year's call letter and 
congratulates them for cooperation and collaboration on many 
policy issues. If OPM describes its own relationship to the 
insurance companies as one of partnership, where does that 
leave us? Federal employees are tired of a situation where OPM 
collaborates with the insurers and passes the costs of such a 
cozy arrangement to us and our fellow taxpayers.
    Time constraints preclude me from raising all of the 
issues, but I would like to touch on a few. The first is OPM's 
proposal to carve out or contract directly for certain health 
insurance benefits such as dental, vision, and prescription 
drugs and make them ``employee-pay-all.'' This proposal was 
included in both President Clinton's 2001 budget proposal and 
OPM's call letter to carriers for 2001. The idea is that OPM 
would step in to use its previous unexercised buying power to 
obtain a good group rate and then leave the rest to us. The 
employee-pay-all approach may be thoroughly consistent with the 
winner-take-all economic policies of the past 20 years, but it 
is in direct contrast to the values that AFGE upholds and we 
want no part of it.
    The second is prescription drug prices and their effect on 
the health benefit premiums. Our employer is in a unique 
position to address this problem. The time is long overdue to 
make available to health benefit programs the discount and 
favorable treatment that the Federal Government has arranged 
for the benefits of the veterans and the military health care 
systems, Medicare, Medicaid, the Bureau of Prisons, and the 
Public Health Service.
    The third issue is that for the last 2 years, insurance 
companies and the health benefit program have been exempt from 
the government cost accounting standards. The Federal 
Government imposes cost accounting standards on contractors as 
a safeguard. The standards from which health benefit program 
carriers have sought and won exemption in each of the past 2 
years prohibit health insurers from passing on to the 
government illegitimate expenses.
    In conclusion, it is almost impossible to open a newspaper 
today without reading about the impending crisis facing Federal 
agencies as they struggle to address the aging of the Federal 
work force and the challenge of recruiting, training, and 
retaining their replacements. The solution is so obvious that 
no one seems to recognize it.
    The Federal Government operates in a competitive world. 
Downsizing, contracting out and privatization, and salaries and 
health insurance that are seriously inferior to what is offered 
in the private sector and State and local governments are the 
causes. The solutions must be addressed. The Federal Government 
must stop trying to get by on the cheap with regard to employee 
compensation.
    Inadequate salaries and an over-expensive health insurance 
program are really two sides of the same coin. More than 
200,000 Federal employees who are nominally eligible to 
participate in the health benefit program are uninsured, 
largely because they cannot afford the premiums. The lack of 
affordability of the health benefit program and the pretense 
that the government is powerless to improve the situation are 
problems that must be faced.
    The Federal Government's CAS should be applied vigorously 
to make sure that every health care dollar devoted to the 
Federal Employees Health Benefits Program is actually spent on 
the program and its beneficiaries.
    Finally, OPM should look around for a new partner to work 
with to sustain a minimum cost, efficient, and comprehensive 
health insurance program for Federal workers. We have a mutual 
interest in the best possible benefit at the lowest possible 
cost. OPM's collaboration with the insurance companies has not 
served the interest of the beneficiaries, the taxpayers, or the 
Federal workers, retirees and their families.
    Mr. Chairman, that concludes my remarks and I am glad to 
answer any questions.
    Mrs. Morella [presiding]. Thank you, Mr. Harnage.
    [The prepared statement of Mr. Harnage follows:]

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    Mr. Morella. I would like to recognize Scott Nystrom for 
his comments.
    Mr. Nystrom. Thank you, Madam Chairman. Thank you for 
asking me to testify on potential economic effects of allowing 
the Federal Employees Health Benefits Program health insurance 
carriers access to the Federal supply schedule for prescription 
drugs.
    My goal today is not to advocate for particular policies, 
but rather to help analyze issues from an economic and market 
process perspective. I would like to highlight two potential 
economic consequences of allowing FEHBP carriers to access FSS 
for prescription drugs this morning. The first potential 
consequence would be to increase prices for nonFEHBP purchasers 
of certain prescription drugs. The second potential consequence 
would be to increase prices of prescription drugs for agencies 
currently receiving discounts on prescription drug prices from 
the FSS.
    The market provides incentive for companies to generate 
enough aggregate revenue from their existing drug portfolio so 
they can fund promising new drug research ideas. If aggregate 
revenue for a company is reduced from one segment of the drug 
purchasing market, the company is likely to develop strategies 
to find resources to fund the next generation of promising new 
drug research ideas. This pressure to continually fill the 
pipeline with new drugs can be a major pricing consideration 
for pharmaceutical companies.
    One of the greatest misconceptions is that there is one way 
to go about prescription drug pricing. For example, many 
believe that all pharmaceutical companies price their products 
based on how much they have already invested to discover and 
develop a drug and then add on whatever profit they want. On 
the contrary, pharmaceutical companies, as rational economic 
actors, are not likely to consider what economists call ``sunk 
costs'' when pricing pharmaceutical products.
    Pharmaceutical companies go through a very complex process 
to determine what price to charge for newly discovered drugs. 
The first consideration is often the current and historical 
prices of competing drugs already on the market. Another 
consideration may be other similar and competitive drugs about 
to come to market. Another competitive factor may be the level 
of promotion among competing products.
    Prescription drug prices are related to future investment 
of undiscovered drugs. Pharmaceutical companies want to invest 
in new drugs to meet consumers' wants in order to increase 
returns to investors. However, investment resources are scarce.
    Pharmaceutical companies have a relatively limited amount 
of funds available compared to the near-infinite number of 
ideas for promising drug research. These companies must rank 
and prioritize the drug research ideas. The companies must then 
decide how many of the drug research ideas can be funded with 
available resources. More resources translate into more drug 
research ideas funded. Consequently, there is always pressure 
to price a company's existing drug portfolio high enough in the 
aggregate to fund promising new drug research ideas within the 
company.
    As a result, if aggregate revenue for a company is reduced, 
as one segment of the drug purchasing market receives larger 
discounts than the previous year, the company has incentive to 
raise enough revenue to fund the next unfunded promising new 
drug research idea. The above scenario is more than a 
theoretical concern. We have considerable evidence based on the 
Medicaid prescription drug rebate program.
    OBRA 1990 established a system for pharmaceutical 
manufacturers beginning in 1991 to grant States rebates for 
drugs dispensed and paid for by State Medicaid programs. States 
would receive discounts from the list price equal to the best 
price available to private sector volume purchasers for 
manufacturers' drugs in exchange for a Federal mandate to 
eliminate restrictive State formularies.
    The legislation altered the best price discounts offered by 
manufacturers in the first 3 years in the rebate program. 
Manufacturers responded to the Medicaid rebate by reducing the 
volume discounts they had offered to reduce the size of their 
legislative rebates and maintain revenue levels sufficient to 
fund priority research ideas and profitability. The average 
best-price Medicaid discount was reduced from roughly 33 
percent in 1991 to about 23 percent by the second quarter of 
1994. At that point it leveled off.
    The Congressional Research Service reported that some 
manufacturers responded to the requirement to offer Medicaid 
their best price by raising prices charged to other customers, 
such as hospitals and HMOs, instead of lowering the prices to 
State Medicaid programs.
    CRS cites the experience of Department of Veterans Affairs 
as evidence of government-induced shifting of the costs of 
rebates to other purchasers. Until 1991 the VA enjoyed deep 
discounts for certain drugs. Beginning in 1991, VA reported 
significant price increases due, they believe, to the 
implementation of OBRA 1990 best-price regulation.
    In conclusion, I want to say whether or not it is a good or 
bad idea to extend the FSS to all FEHBP health insurance 
carriers is beyond the scope of my testimony. However, past 
evidence suggests that any attempt to provide access to the FSS 
for FEHBP prescription drug purchases is likely to lead to 
higher prices for certain yet undetermined prescription drugs 
for the nonFEHBP purchasers. Three groups that immediately come 
to mind are retail purchasers who are facing higher out-of-
pocket costs due to rising prices. That group would include 
about a third of all Medicare beneficiaries. Current FSS 
purchasers, the Department of Veterans Affairs, the Department 
of Defense, the Public Health Service and the Coast Guard are 
likely to experience higher prices if this policy were to be 
taken to its logical conclusion.
    Smaller managed care plans with lower volume of purchasing 
needs and weaker negotiating positions with manufacturers and 
wholesalers also would likely see higher prices.
    One thing is that the FEHBP program drug expenditures of 
about $5 billion dwarfs the FSS with estimated pharmaceutical 
sales of $1.6 billion in 1999. In short, the FEHBP has the 
potential to become the major pharmaceutical purchaser from the 
FSS if allowed to participate.
    If the SAMBA pilot were extended to all FEHBP carriers for 
all drug purchases, there is considerable uncertainty about the 
extent of the price increases and which nonFEHBP purchasers 
would be more likely to experience price increases. However, 
history suggests that price increases for certain prescription 
drugs for nonFEHBP purchasers are likely to occur if the SAMBA 
pilot were expanded. Thank you very much.
    Mrs. Morella. Thank you, Dr. Nystrom and all of the 
panelists for their testimony.
    [The prepared statement of Mr. Nystrom follows:]

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    Mrs. Morella. I will start with Mr. Harnage, because we 
heard your testimony and we also heard the questioning that Mr. 
Cummings had posed with regard to your concern about OPM not 
speaking that clearly for AFGE, for its members, in the annual 
negotiation with the carriers.
    What do you think should be done? First of all, what 
expertise would AFGE bring to the negotiations? Second, would 
you recommend that other parties be included in the 
negotiations? And I also wonder why--maybe you might sponsor a 
plan, an AFGE plan like some unions might do. Maybe you would 
like to address that, Mr. Harnage, to give us direction so, 
working with OPM, we can make sure that you are included.
    Mr. Harnage. First of all, I haven't given any thought 
about AFGE having its own health benefit program. We did many 
years ago, but because of the problems that we had with people 
meddling in the business, we found it much better to get out of 
the business and try to make the Federal Employees Health 
Benefits Program better. What I mean by that is--I will give 
you an example. One year we looked at Blue Cross and Blue 
Shield, Aetna and AFGE's plan, and came up with a Cadillac plan 
which would provide the best benefits available for Federal 
employees. Although our cost went from $12 to $16 premium, and 
we would love to see those premiums again, it was considered 
inflationary because it was a 25 percent increase in cost. That 
same year, Blue Cross and Blue Shield was an $18 premium with 
less insurance. We weren't allowed to be competitive, and the 
excuse that Mr. Divine gave us, and we all remember him, was 
that he had to maintain the competitive edge. So it wasn't 
looking for the best deal for the government or the taxpayers, 
it was looking for the best deal for the insurers. So we got 
out of the business. I am not too sure that I want to get back 
into that.
    We have seen an improvement in our opportunity to talk with 
OPM about the program. Our problem is that we are not getting 
to the substance of the issues and we are not participating 
directly with the carriers so that we can bring our opinions 
and thoughts to the consideration.
    We travel all around the Beltway and deal with Congressmen 
and their staffs and committees and subcommittees and their 
staff. I have work groups working in the Pentagon and OMB and 
OPM, all over government, and I think everybody will recognize 
that we bring quite a bit of expertise to the table. We give 
people more facts to consider; not that we are always right, 
but it is good food for thought. If I don't have the expertise 
that they need, I will certainly get it. But there is no need 
for me to get that expertise and not have an opportunity to use 
it, so the excuse that we are not qualified is not a real 
justification for not letting us be at the table.
    Mrs. Morella. You are not at the table but you can offer 
suggestions?
    Mr. Harnage. Exactly. We have some discussions in what is 
referred to as a work group, but we are not getting down to the 
nuts and bolts.
    Mrs. Morella. Would you include other parties?
    Mr. Harnage. Sure. We think we are the best, but we would 
allow them to be in the room also.
    Mrs. Morella. You said employees could not afford the 
premiums. I will ask later whether that is a great number and 
what you would do to resolve that.
    But let me get on to Mr. Gammarino. A constituent of mine 
suffers from periodic migraine headaches, cluster headaches, 
and her prescription drug is for Imitrex, and each prescription 
includes 6 doses and can be refilled 3 times a year, 18 doses 
per year. These migraines plague her once or twice a month. 
With the medication she can function normally, and without it 
the pain is too intense for her to do anything.
    In her particular FEHBP program, prescription drug costs 
are controlled by limiting the number of doses. Clearly her 
plan is trying to hold down costs, which is laudable, but it 
seems like the cost restraint objective could be met as well by 
making more widespread use of the Federal supply schedule's 
discount prices for those covered by other FEHBP plans. Would 
you comment on that?
    Mr. Gammarino. Well, I heard two questions. One was 
associated with this particular case and the quality assurance 
program that this health plan has associated with ensuring that 
the medication is dispensed according to the guidelines, not 
knowing the particular case. That is one issue that the health 
plan is involved in screening for this.
    I would say one is a program that also has these prior 
approval programs. The goal is not cost containment. It is part 
of the patient safety. There are FDA guidelines for dispensing 
drugs. One of the issues that we all face is that many times 
the pressures at the point of dispensing is to go beyond those 
guidelines. So not knowing that particular case, there is a 
balance between quality and cost.
    The second question gets to the Federal supply schedule. I 
can't tell you how strongly I am opposed to it. One is, from my 
layperson's reading of the statutory requirements to obtain 
these types of discounts, I think it is inappropriate for any 
FEHBP carrier to receive them.
    Second, this is not a government program. It is not 
Medicare, it is not Medicaid. This is a program that the 
government has chosen to use, the private insurer competitive 
model to provide the type of care and health care coverage that 
enrollees would like.
    I think a couple of questions should be asked. I don't know 
the specifics of what SAMBA is actually requesting or what they 
are actually going to get, but if I were a Federal enrollee I 
might ask two questions. One is, what drugs am I going to be 
allowed to receive if I use the VA price schedule? Is there any 
type of restrictions associated with that? I don't know the 
answer.
    Second, where do you stop? If you want to use the VA price 
schedule, and this clearly is driven by cost and not quality, 
this initiative, then do you use other Federal advantages? Do 
you go far--would the enrollees next expect to, instead of 
having the selection of health care providers like Georgetown 
and Johns Hopkins, would they be able to get access to the VA 
facilities, if price is the sole objective of these types of 
initiatives?
    So I think from the enrollee point of view I would be 
concerned and have some questions about where the government is 
going when they seek to go this route.
    Mrs. Morella. I thank you.
    In the next round of questioning, I would ask Dr. Nystrom 
also about his opinion on that Federal supply schedule concept. 
But my time has now expired. I am pleased to recognize Mr. 
Cummings.
    Mr. Cummings. Thank you very much, Madam Chair.
    Let me ask you this, Mr. Gammarino. You mentioned a few 
minutes ago this whole idea of prescription drugs being 
advertised on television. I guess that is what you are talking 
about.
    Mr. Gammarino. That is one of the primary vehicles, and 
print campaigns also.
    Mr. Cummings. So you all can see--has this--if I understand 
your testimony, you believe that there is a direct link between 
that advertising and the fact that more and more people are 
getting these prescriptions?
    Mr. Gammarino. Yes. Studies have been done. For example, 
the top 10 drugs today that are advertised, that are--the 
Claritins, etc., they make up 20 percent of the prescription 
dollar today. I think there have been enough studies already to 
show a direct correlation.
    If you just go back 5 years in terms of how information was 
dispensed, primarily drugs were under the control of a doctor. 
They were heavily detailed by drug manufacturers. They had all 
of the information. The Information Age has changed all of 
that. We applaud that, but one of the problems you have is now 
you have the consumer, that patient walking into their doctor 
with that ad, and they say, ``I have the migraine; I not only 
want relief, but I want relief with this.'' That is the real 
world. I think studies have shown that doctors feel 
considerable pressure to meet that demand.
    Mr. Cummings. The way it used to be, if you did that, it 
was because one of your neighbors or friends said, we have the 
same problem and I am using so-and-so drug. That is probably 
about the only way it would have come up.
    Mr. Gammarino. Right. So the informed consumer is driving 
some demand, and that is not all bad. We support and are going 
to continue to provide ways to allow our members to receive 
information. I think one of the things that we have to ensure 
is that the information is balanced and that they see more than 
just the green fields and the yellow flowers that they see in 
the ad, that they have been exposed to the fine print that 
shows how drugs, if they are misused, you can have adverse 
reactions and wind up in the emergency room.
    Mr. Cummings. Do you think one of the factors for the 
greater use of drugs is this whole movement--it is kind of old 
now--towards ambulatory care as opposed to people spending time 
in hospitals? Do you think that has had any impact at all? In 
other words, people more or less taking care of themselves 
outside the hospital? Has any of that had an affect, such as 
Mr. Flynn saying at one time it was 3 percent and now it is $1 
out of $4 spent for drugs?
    Mr. Gammarino. I am sure that is a piece of it. There are 
so many components. One thing that I would like everybody to 
reflect when they talk about the changes, everybody seems to 
focus on price. And I will be the first to tell you I would 
like better discounts and will try to achieve them. But the 
reality is, Mr. Cummings and Mrs. Morella, that if we got the 
VA pricing schedule, you would still have us up here. You would 
still have us up here asking why the rates are the way they 
are, because that is not the primary reason that these health 
care costs are where they are today.
    The milieu has changed. Drugs are a benefit for enrollees. 
They are used very differently today. I mean, my father had a 
heart attack at 53. That is the first time he was identified as 
having that condition. No prior use of drugs. Today an 
individual probably is on blood pressure medicine at 30 and he 
is on it for the rest of his life. And the reality is that it 
costs money, and the reality is that Blue Cross and Blue Shield 
specifically is here to serve those people, and we use our 
leverage in the marketplace to make it as affordable as 
possible, but the reality is that many of these people need 
this medical care.
    Mr. Cummings. What are your suggestions as to how to 
prevent the costs from going up? I am trying to stabilize them 
to some degree. Seeing this 30 percent over the last 3 years, 
and now it looks like we have another 8.7 percent possibly 
coming up, and I know you must think about this all of the time 
and try to figure out what you can do, and is there anything 
that we can do as a Congress to help out?
    Mr. Harnage. Well, there are two ways to--I think three 
ways to effect change in this area. One is benefit design. Two 
is the price that we pay for the services; that is, the 
discounts that we get from the providers and the drug 
manufacturers. And the third is ensuring that it is used where 
it is appropriate. I think we are going to need a combination 
of all of those. I know that we are going to spend a lot of 
time trying to educate our enrollees about how to make informed 
decisions because this is a market today that is driven by the 
consumer, make no mistake about it. The insurance companies 
have very little control over utilization, and I would tell 
you, and I would say if you had a panel of physicians up here, 
many of them would tell you they lost control over how things 
are used. So a lot of our efforts are going to be on the 
enrollee.
    We feel that this particular population would be--would 
adapt very well to information and education. They are smart. 
They are educated. They have information tools through the 
Internet, etc., that if we make a big push with the support of 
the agency, AFGE, other groups, we think that we can make an 
impact that way. But we are not going to do it in restricting 
care. We are not going to do it in saying no.
    With that I will respond to any other questions you have.
    Mr. Cummings. Thank you.
    Mrs. Morella. I am pleased to now recognize the gentlewoman 
from the District of Columbia, Ms. Norton.
    Ms. Norton. Thank you, Mrs. Morella. I apologize and regret 
that I could not be here to hear the Office of Personnel 
Management's testimony.
    I do want to say this for the record. That I am very 
disappointed in OPM and FEHBP in the last few years and the 
increases that the Federal workers have had to absorb. During 
the time that the President was seeking to universalize health 
care, an effort that the Congress turned back, FEHBP was 
continually cited as a model--even if we couldn't do it that 
way when the President proposed several different approaches to 
get to universal health care. Look at what the Federal 
Government does for its employees and the Members of Congress, 
and you will see that they take advantage of the large number 
of employees and they provide model health care and they keep 
costs down. Bull.
    In fact, we saw that costs were kept down for a number of 
years, and I believe that the reason that those costs were kept 
down was almost entirely in response to the threat of universal 
health care, because as soon as that threat passed, not only 
were increases experienced throughout the private marketplace, 
but right here where we were supposed to have a model system, 
costs began to jump straight up.
    I have asked that question at prior hearings of this kind 
and I was assured that there were different market conditions 
now, and I must tell you, I no longer believe that. One reason 
I no longer believe that is because the costs keep going up, 
and another is because OPM appears to be moving backward.
    I want to say in no uncertain terms, when we have 60 
million people without health care, at a time when we are only 
incrementally, child by child perhaps, trying to get people who 
are not covered, the whole notion that OPM would come forward 
with an employee-pay-all notion is preposterous and outrageous.
    The Federal Government is not going to be able to hire 
doodedly squat if in fact it continues to go in this direction. 
The Federal Government is facing a complete evacuation of the 
Federal Government because of the numbers of retirees, we have 
already downsized the number, and because, very frankly, where 
it is at today is in the private sector. That is where all of 
the sex appeal is. That is where the tech jobs are. So the 
model work force that we have had, we would have a hard time 
getting it if we paid 100 percent of health care, the way many 
private companies do, and now we are going in the opposite 
direction. Do you expect somebody to want to work for the 
Federal Government?
    I think this is so outrageous when the analysts are already 
beginning to do what I can only call scary analysis of who is 
going to run this government. The President was right to do 
voluntary downsizing, to right-size the government. It should 
have stopped now, at least a couple of years ago, when you 
consider that we are taking the head off the body, and the 
people who make things run have found out that they can make a 
lot more money making things run for the private sector, and 
the people who have not yet gotten their careers started don't 
even want to talk to Federal recruiters.
    And now what does OPM say? We are going to carve out some 
stuff that you can pay for yourself and maybe we will help you 
out a little bit and referee when you do that. This is crazy. 
It is going to hurt the Federal service and every Member of 
Congress when we run a government that cannot be run with the 
first class people that we have been able to attract in no 
small part because of retirement and health benefits.
    The private sector has long ago leapfrogged over us and 
what we see is an FEHBP that I no longer consider a model, and 
an FEHBP who is pricing our people out of it. The Federal 
Government has nothing to be proud of. You have the largest 
work force in the country, you have something to work with. You 
have got market strength. You can make things happen not only 
for the Federal Government worker but for everybody else by 
leading the way.
    We are not using the economy of scale that is ours simply 
because we have the largest work force in the country. We are 
diddling and acting as if we were some corporate employer 
trying to save money and trying to carve out, until he finds 
out that his competitors are stealing all of his workers. Our 
competitors have been doing that now for at least a couple of 
decades, and we are asleep at the wheel. The way to become 
completely unconscious is to start messing over people's health 
benefits, to keep allowing these benefits to go up without 
finding some way to contain these costs.
    I don't know what you have had to say today, but I hope 
that OPM had something to say that begins to move beyond their 
business as usual. This is the old 1940's Federal Government 
approach to employee benefits, especially health benefits and 
the need for the Federal Government to retain and recruit 
workers. Thank you, Madam Chair.
    Mrs. Morella. Thank you, Ms. Norton.
    Dr. Nystrom, I would like to ask you about the Federal 
supply schedule and your opinions.
    Mr. Nystrom. My response today to being asked to be a 
witness was that there are impacts, there are consequences of 
extending the FSS schedule to the FEHBP program. And the 
consequence--we can project the direction--that is, prices in 
other segments of the market will probably go up, but it is 
difficult to predict exactly which segments will be hardest hit 
and which drugs will have their prices raised by the industry 
if the deep discounts enjoyed by VA and other agencies are also 
included through the FEHBP.
    Mrs. Morella. I noted also, switching around, Mr. 
Gammarino, I know that you have to leave by 12:30. I am going 
to ask you one question. You have permission to leave at any 
time and we appreciate you being here. I am interested in your 
response to the medical errors concept that we talked about and 
the fact that there is legislation, and the bill that I have 
been pushing was crafted with the U.S. Pharmacopeia in terms of 
the data bases and the voluntary reporting of errors in order 
to share solutions. I wonder if you might comment on that.
    Mr. Gammarino. What I would like to comment on is how we 
can participate in this activity. We do have a role, although 
we don't dispense drugs and we don't deliver health care. We do 
have information and we are probably the best source of 
information for many patients because we have through our 
claims records, we have the history of the drugs that they have 
received and the medical care that they are getting today. We 
have a number of things that we want to look at. We have one 
pilot that we have talked to OPM about and we are both excited 
about exploring it.
    It would take an initiative that is in the private sector 
of Blue Cross and Blue Shield, specifically the Empire Blue 
Cross and Blue Shield plan, that allows us to provide 
information to the patient's attending doctor that would allow 
that provider the information to better manage that 
individual's care.
    We have seen it work in the area of drugs where one 
physician may not know about how drugs are being dispensed by 
other physicians that that patient may be receiving and that 
can actually save lives.
    It can also be used in other areas of medical care to red-
flag and provide information to the provider if in fact, for 
example, a person with chronic diabetes is not receiving the 
types of followup care he or she may be needing. We hope to 
have this pilot going later this summer and we hope next year 
to have various forms of this pilot out there in other Blue 
Cross and Blue Shield plans. We are excited about the ability 
to support this initiative, particularly with the unique role 
that we can play.
    Mrs. Morella. Excellent. I am glad to hear that.
    Ms. Norton, did you have a question that you wanted to ask 
of Mr. Gammarino before he leaves?
    Ms. Norton. No.
    Mrs. Morella. Mr. Harnage, what can we do about these 
Federal employees that you say find the premiums prohibitive? 
Do you have a suggestion, or is this just a suggestion about 
the statement that we can't keep having medical costs go up 
year after year?
    Mr. Harnage. The basic question that I continue to ask 
myself is why is the largest employer in the United States 
paying the highest premium and doesn't have as good of health 
care as much smaller employers do, and why aren't we looking at 
what is going on? We want to follow the best practices of the 
private sector, and I don't particularly like that term because 
it indicates a reverse. I can remember when the Federal 
Government set the precedent and was looked at as the model 
employer. Why aren't we looking at those employers that are 
much smaller than the U.S. Government that have better plans at 
a lower cost and see what they are doing that the Federal 
Government could be doing?
    We are not taking advantage of the volume that we represent 
at the marketplace. The comment was made that this is not a 
government program, and I am inclined to agree with that, 
although the government is paying for it. What we do is we ask 
each year in November for the individual Federal employee to go 
shopping, and they go shopping for what they can afford, not 
for what they need; instead of the Federal Government going 
shopping for them in volume, and saying here are the programs 
that we want to provide for our employees regardless of what 
you charge for them.
    Instead of taking the opportunity for volume dealing, we 
are letting the insurers tell us what it costs and then letting 
the Federal employee do the shopping for us. I think that has 
got things backwards. Those are the simple questions that you 
ask yourself.
    When we talk about the Federal supply on the prescription 
drugs, that it is going to increase the costs for those 
currently participating in it, I think that is missing the 
mark. We are looking at everything as if we had 50 different 
governments in the United States, and we have only one. So if 
you reduce the cost of the Federal Employees Health Benefits 
Program by $1, but you increase the cost of the other 
participants by a dime, it doesn't take a rocket scientist to 
know that you are 90 cents better off overall.
    And to compare the Federal Government to the private 
sector, to the entire population of the country, you have to be 
talking about socialized medicine to make that comparison. We 
have to compare the Federal Government as an employer, not to 
the population. But if we increase the cost for a tin of 
aspirin by a nickel, but we reduce the government's cost by a 
dime, that person that is paying that additional nickel is 
getting a dime's worth of benefit in reduced taxes. Again, it 
doesn't take a Ph.D. to figure out that you are saving money.
    That is what we are looking at. The Federal employees are 
the largest single group of taxpayers in this country. We have 
an interest in what taxes are. If we can reduce the cost of 
government, we can reduce the cost of our taxes as well.
    Mrs. Morella. I thank you for that very thoughtful 
statement. And I will pick up finally with Dr. Nystrom again, 
because of something that earlier had been in the testimony 
that Mr. Harnage had presented, again dealing with prescription 
drugs and the fact that drug prices are higher in the United 
States than in Europe and Mexico, Canada, and that drugs for 
humans are more expensive than drugs for animals.
    I just wonder how you would respond to this statement. Are 
Americans being gouged by drug companies? Mr. Gammarino raised 
a number of concerns about government policies that may 
contribute to high drug costs, and I wondered if you would 
agree with any of them, or do you believe that some policies of 
the Federal Government do artificially raise the costs of 
drugs; and if so, what are these policies? I wanted to get your 
opinion on the prescription drug a bit more.
    Mr. Nystrom. I guess I would not use colorful language like 
``gouged.'' I would say that the market, on the contrary--for 
example, you talk of other countries having lower drug prices. 
Many of these countries have price controls on their 
pharmaceutical products, and as a result I think an economist 
would look at those countries as more free riders on the 
overall system of the pharmaceutical industry.
    And, as such, there are differences in price for all kinds 
of different reasons, and there have been a few studies on 
this, some done more methodologically rigorous than others. But 
Mexico, which has a lower per capita income, they don't have 
the income to purchase at the prices that U.S. consumers might 
be willing to pay because of the value of the drug. They have 
weaker patent protections in some of these countries, Mexico 
being one, at least before 1992 and NAFTA. They also have--
consumers are probably a little more price sensitive outside of 
the income issue. So there are different reasons why prices are 
different in different countries, and I think it is extremely 
complex and I wouldn't begin to talk about it in this forum 
without spending a lot more time looking at it.
    You asked about policies of the Federal Government 
raising--artificially raising the cost of drugs. There are two 
policies that contribute a good deal to the cost of drugs. One 
is the FDA approval process which is very time-consuming and 
very costly. The other is probably the patent protections that 
are offered to companies. Now there are reasons why the 
government offers patent protections to companies that innovate 
drugs. It is because they want companies to have the financial 
and economic incentive to go out and discover new drugs. 
Without patent protections, you don't have the incentive that 
you need if you want new drugs. Were those the two questions 
that you asked?
    Mrs. Morella. Yes. Mr. Gammarino, do you want to make any 
final comment?
    Mr. Gammarino. No. I appreciate you listening and will 
enjoy working with you in the future.
    Mrs. Morella. Thank you. Mr. Harnage, any final comments?
    Mr. Harnage. I appreciate this committee's interest in this 
issue, and in particular yours. But today there was a question 
about CAS, the cost accounting standards from the 
representative of OPM. One important thing was not said, and 
that was that OPM opposes the waiver of the CAS standard. Why 
that wasn't said this morning puzzles me, since I have had 
conversations with the administration and with the Director of 
OPM about how this has happened in the past. It caught us all 
by surprise when it was put in last year. When I asked how it 
happened they said, we were not aware of it, it snuck by us. I 
said, let's don't let it happen again in 1999. It happened 
again in 1999, although they got a letter over on the Hill at 
the 11th hour that they were opposed to it.
    This year I asked them to get the word on the Hill earlier 
and more strongly that they were opposed, and I have been 
assured that they would do that.
    For the representative of OPM today to not quickly and 
emphatically state to you that they are opposed to the waiver 
of the CAS standard is puzzling to me, and I am going to find 
out the answer to that and I hope you will, too.
    Mrs. Morella. We will, and we still have some OPM 
representatives here.
    Dr. Nystrom, any final comments?
    Mr. Nystrom. No. It is very gratifying to be here and 
especially to appear before my own Congresswoman, and I hope 
that I have been of some assistance.
    Mrs. Morella. I didn't realize you were a constituent. 
Indeed, I should have realized from how brilliant you are.
    I do want to thank you for being here for this panel and 
ask you if it is OK for some questions to be forwarded to you. 
There are a number of questions that we didn't get to, and we 
would like the benefit of your responses; and OPM knows that we 
traditionally do that also.
    And so on behalf of the entire subcommittee, I thank you. 
The hearing is adjourned.
    [Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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