[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
    MEDICARE DRUG REIMBURSEMENTS: A BROKEN SYSTEM FOR PATIENTS AND 
                               TAXPAYERS
=======================================================================


                             JOINT HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                and the

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 21, 2001
                               __________

                           Serial No. 107-65
                               __________

       Printed for the use of the Committee on Energy and Commerce













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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     TED STRICKLAND, Ohio
NATHAN DEAL, Georgia                 THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina         LOIS CAPPS, California
ED WHITFIELD, Kentucky               RALPH M. HALL, Texas
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING,          ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma              DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina         CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
  Vice Chairman                      JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire         (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                 (iii)














                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Bentley, Zachary T., President, Ven-A-Care, Inc..............    46
    Connaughton, Thomas A., President, American Association of 
      Homecare...................................................   110
    Emanuel, Ezekiel, Chief, Clinical Bioethics Department, 
      Warren G. Magnuson Clinical Center, National Institutes of 
      Health.....................................................   117
    Grob, George F., Deputy Inspector General, Department of 
      Health and Human Services..................................    38
    Lamphere, JoAnn, Lewin Group.................................   115
    Martyn, Kevin, Executive Director, Care For Life.............   107
    Norton, Larry, President, American Society of Clinical 
      Oncologists................................................   101
    Scanlon, William J., Director, Health Care Issues, General 
      Accounting Office..........................................    30
    Scully, Thomas A., Administrator, Centers for Medicare and 
      Medicaid Services..........................................    82
Material submitted for the record by:
    Sands, Leo E., Executive Vice President, Chief Compliance 
      Officer, US Oncology, Inc., letter dated September 19, 
      2001, to Hon. James Greenwood, enclosing material for the 
      record.....................................................   145
    Stark, Hon. Pete, a Representative in Congress from the State 
      of California, prepared statement of.......................   143

                                  (v)

  














    MEDICARE DRUG REIMBURSEMENTS: A BROKEN SYSTEM FOR PATIENTS AND 
                               TAXPAYERS

                              ----------                              


                       FRIDAY, SEPTEMBER 21, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                               Subcommittees on Health,    
                          and Oversight and Investigations,
                                                    Washington, DC.
    The subcommittees met, pursuant to notice, at 9:40 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis and Hon. James C. Greenwood presiding.
    Members present Subcommittee on Health: Representatives 
Bilirakis, Barton, Upton, Greenwood, Burr, Ganske, Norwood, 
Bryant, Buyer, Pitts, Tauzin (ex officio), Brown, Barrett, 
Capps, Hall, Pallone, Deutsch, Stupak, Engel, and Green.
    Members present Subcommittee on Oversight and 
Investigations: Greenwood, Bilirakis, Stearns, Gillmor, 
Largent, Burr, Bass, Tauzin (ex officio), Deutsch, and Stupak.
    Staff present: Chuck Clapton, majority counsel; Yong Choe, 
legislative clerk; and Edith Holleman, minority counsel.
    Mr. Greenwood. Good morning. This joint hearing of the 
Energy and Commerce Committee's Subcommittees on Oversight and 
Investigation and Health will now come to order. Before we 
proceed with the members' opening statements, Mr. Bilirakis and 
I would like to make a few remarks.
    Among the thousands of lives so hideously taken from us on 
September 11 was that of Lisa Raines. Lisa Raines was the 
senior vice president of government relations for Genzyme 
Corporation. Those of you who knew her know she was a giant in 
the biotech and pharmaceutical industry for at least the past 
15 years and a friend to many. Her memorial service is 
scheduled for 11 o'clock this morning, and for that reason 
these subcommittees considered very seriously postponing once 
again this hearing. We wish we could have done that.
    By the conclusion of this hearing, I think it will be 
apparent to all the urgency to fix this broken AWP system. 
Given the fact that we have only about 4 weeks for session for 
this year, we concluded that it was impossible, particularly 
given next week's short schedule, to postpone this hearing once 
again. We regret we had to make that decision because we know 
there were many who would like to be here, but also felt their 
priority was to be at the memorial service.
    Having said that, I would like to recognize Chairman 
Bilirakis for his comments.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    On September 11 of this year, American's calm was shattered 
by a horrendous act of terrorism that will long be remembered. 
Our thoughts and prayers are with those whose lives have been 
forever altered by this tragedy.
    When American Airlines flight 77 went down, the health 
community lost a dear friend and respected colleague, Lisa 
Raines. Lisa was a senior vice president of government 
relations for Genzyme Corporation. Lisa had worked closely and 
often with the Energy and Commerce Committee through the years, 
working to enact the Drug Export Amendments Act of 1986, the 
prescription drug user fee, PDUFA, the FDA Export Reform and 
Enhancements Act of 1996, and the Food and Drug Administration 
Monitorization Act, or FDAMA.
    A vital member of the Washington biotechnology and 
pharmaceutical community, Lisa previously worked for the 
Industrial Biotechnology Association, now BIO, and the 
Congressional Office of Technology Assessment. Lisa's expertise 
and insight as well as her bright personality and charm will be 
missed by this committee, the Congress and the health 
community. I think the publication BioCentury said it best when 
it said Lisa was as much a fixture of the biotech industry as a 
double helix, and it is hard to comprehend that she is gone. 
She leaves a hole in the industry's relationship with the 
outside world that will be difficult to fill.
    I join with the chairman and members of this committee as 
we offer our condolences and prayers to Lisa's family and 
friends. Please join us in a moment of silence in honor of Lisa 
Raines.
    [The prepared statement of Hon. Michael Bilirakis follows:]
Prepared Statement of Hon. Michael Bilirakis, Chairman, Subcommittee on 
                                 Health
    I'd like to thank Chairman Greenwood for joining me today to 
examine the issues surrounding the current system for Medicare drug 
reimbursement. The Health Subcommittee has spent a considerable amount 
of time in this Congress examining how best to add a comprehensive 
prescription drug benefit to the Medicare program. This hearing builds 
off of work we began in the last Congress where we examined the 
reimbursements for the limited drug coverage currently available in the 
Medicare program.
    I'd like to welcome and thank all of the witnesses, including Tom 
Scully from CMS and Bill Scanlon from GAO. We rely often on these 
government officials and their offices for factual information and 
detailed analysis, thank you for coming today. I'd also like to welcome 
Mr. Zachary Bentley from my home state of Florida. I know that your 
testimony, and that of all the witnesses, will help inform the 
Committee and the public about the issues regarding Medicare's current 
reimbursements to health care providers for certain drugs used to treat 
patients.
    The Medicare program currently provides coverage for a small number 
of drugs, limited principally to those that are administered incident 
to a physician's treatment or in conjunction with covered durable 
medical equipment, such as inhalation drugs used with a nebulizer. 
Since at least 1992, Medicare has determined the appropriate 
reimbursement price for these covered drugs by referring to an industry 
trade publication known as the Red Book, which lists what manufacturers 
purport to be the Average Wholesale Price for their drugs. Since 1997, 
providers who administer these drugs to Medicare beneficiaries have 
been reimbursed for their cost at prices equal to Average Wholesale 
Price (AWP) minus five percent. Of this set amount, Medicare Part B 
covers 80 percent, while Medicare beneficiaries can be required to pay 
the remaining 20 percent as a co-payment. Today's hearing will examine 
how Medicare's current reimbursement system, for the relatively few 
drugs that are covered, is costing beneficiaries and taxpayers more 
than is necessary and may be having an adverse impact on the health of 
some of our most vulnerable citizens.
    I recently toured a Clearwater oncology center in my Florida 
district and I can tell you what great work oncologists do and how 
important their work is to so many Americans. At the request of my 
constituent Dr. Marcos Joppert I would like to admit this white paper 
on oncology payments into the record.
    This will prove to be a lengthy hearing and thus I will limit my 
opening statement so that we may get to the important testimony of the 
witnesses--who I again thank for their effort and cooperation.

    Mr. Greenwood. Thank you, Chairman Bilirakis, for your 
comments. As the President said, let us get back to work.
    Let me begin by thanking all of the witnesses who have 
agreed to testify today at today's hearing. Your testimony will 
shed light on an insidious problem about how the Medicare 
program reimburses health care providers for certain drugs used 
to treat very sick patients. Today's hearing, which is a 
culmination of years of investigative and audit work performed 
by subcommittee staff and the witnesses from our first panel, 
will examine how Medicare's reimbursement system for the 
relatively few drugs currently covered by the program is 
costing Medicare and its beneficiaries roughly $1 billion every 
year in overcharges while having an adverse impact on the 
health care of some of our most vulnerable elderly and disabled 
citizens.
    We will hear how the manufacturer of a chemotherapy drug 
like Vincasar sold it to health care providers for $7.50, then 
reported the price to Medicare as $740. Medicare paid the 
doctor almost $600 for the same drug, and the poor sick patient 
got hit up for another $150.
    We will also hear today from the Department of Health and 
Human Services Office of Inspector General about how many other 
overcharges result in Medicare paying more than $886 million 
every year in inflated prices for just a sample of 24 Medicare-
covered drugs reviewed by that office. The total figure for all 
Medicare-covered drugs very likely exceeds a billion dollars 
each year.
    It should be noted that Medicare currently reimburses for a 
very limited number of drugs, chemotherapy agents, blood-
clotting factors used to treat hemophilia and inhalant drugs 
used to treat respiratory diseases, the total cost of which is 
approximately $4 billion a year. A billion dollars of taxpayer 
dollars is wasted every year in this program because under 
current Federal law and regulations, Medicare is paying for 
drugs at AWP. AWP, or average wholesale price, could also be an 
acronym for ``ain't what's paid.'' It is quite clear that 
despite its name, AWP is not the average wholesale price at 
which these drugs are sold to health care providers or anything 
close to it. To the contrary, it appears that for many of these 
drugs, AWP is simply an artificial price established by certain 
drug manufacturers and reported to industry trade publications 
for purposes of third-party reimbursement, a price which bears 
little, if any, relationship to what is actually paid for these 
drugs by health care providers.
    Before we go further, however, let us be clear about one 
thing. Most drug companies establish AWPs that are, in fact, 
fairly reliable indicators of average wholesale prices, but in 
those instances where they do not, the difference between what 
providers actually pay and what Medicare reimburses results in 
what is commonly referred to as a spread, an unwarranted profit 
pocketed by the health care provider each time he or she 
utilizes that particular drug. We will see evidence today 
demonstrating how some drug manufacturers have manipulated the 
reported AWPs and thus the spreads on their drugs in order to 
create financial incentives for providers to use their drugs 
over competitors' products. In doing so they have provided a 
financial windfall to the health care providers that enables 
them to sell more of their drugs. In the words of one 
manufacturer, this is a win-win-win situation for 
manufacturers, wholesalers and health care providers. The big 
losers in these marketing ploys are the Medicare program, its 
elderly and disabled beneficiaries, and the American taxpayer, 
all of whom have to foot the bill for greatly inflated drug 
costs.
    Of even greater concern to America's seniors than the 
impact of having to pay inflated copayments on drugs based on 
prices that are sometimes tens or hundreds of times higher than 
what their health care provider actually paid for the drugs is 
that they also may have had the quality of their health care 
adversely affected by this perverse system. We will hear how 
the profits available for utilizing certain drugs appear to be 
improperly affecting some health care providers' clinical 
decisions, influencing them to provide unnecessary care and 
utilize drugs based on profit margins rather than therapeutic 
efficiency.
    For example, we will learn of cases in which the 
utilization of certain drugs skyrocketed without any reasonable 
clinical justification after manufacturers created large 
Medicare-funded financial windfalls to health care providers to 
encourage them to use their drugs. In one such case, and the 
case is on the screen there, Medicare utilization and 
reimbursements of the inhalation drug ipratropium bromide used 
to treat respiratory diseases increased more that twentyfold 
between 1995 and 2000, from $14 million in 1995 to more than 
$300 million in 2001, a time period in which the drug went from 
having no spread to having a Medicare-covered spread of 300 
percent.
    We will also hear about how terminal cancer patients 
received aggressive courses of chemotherapy, raising questions 
about whether the motivation for providing such care was the 
profit available from the use of Medicare-covered chemotherapy 
drugs.
    Congress has long championed the fight against cancer. We 
supported increased funding for research at the National 
Institutes of Health and to improve the quality of clinical 
care. We fought to ensure that the proper incentives exist to 
develop new and innovative drugs. To then learn of the 
instances in which quality of patient care might have been 
adversely affected by the financial benefits available to 
providers from utilizing certain drugs is nothing short of 
outrageous. While providers and their associations strongly 
denied being influenced by any such considerations, we cannot 
tolerate a system that could leave such motivations even open 
to question.
    Providers do not generally deny that they often reap huge 
profits on the utilization of certain Medicare-covered drugs. 
Instead they argue that they currently depend on these profits 
in order to make up for other services in which Medicare under-
reimburses them. We will hear testimony today that will confirm 
that like many other groups of providers, these providers who 
administer Medicare-covered drugs are not fully reimbursed for 
all the costs associated with treating their patients.
    We should reimburse all providers fairly for their 
expenses; nevertheless a system in which the use of certain 
drugs can influence clinical medical decisions is not the 
answer. Life-and-death decisions about the treatment of those 
who suffer from the scourge of cancer should be governed 
exclusively by a concern for the patient and not the margin of 
profit.
    When this hearing is over, my colleagues and I will work 
with this new administration as well as providers and drug 
companies to scrap this flawed system. We will need to develop 
a solution that results in Medicare paying prices for drugs 
that are closer to the actual prices paid by health care 
providers. Similarly we will need to take steps to ensure that 
health care providers are sufficiently reimbursed for all of 
their services so that the quality of care they provide to the 
Medicare patients is not diminished by changes made to the drug 
reimbursement system.
    I look forward to hearing from CMS Administrator Scully 
today about what steps his agency can be directed to take to 
guarantee that this scandal is resolved as quickly as and 
effectively as possible. In these new and perilous times when 
our Nation and our people may be called upon to make great 
personal and financial sacrifices in the defense of our 
country, Congress has the heavy burden of making sure that 
every available resource is used wisely, and if we hope to find 
a way to pay for an expanded Medicare drug benefit that will 
assist seniors to purchase prescription drugs even as we take 
on a renewed and determined defense of our homeland, these 
abuses cannot be tolerated.
    If we are going to provide Medicare beneficiaries with a 
comprehensive prescription drug benefit, and we must, we have 
to stop wasting billions of dollars on the existing program. We 
will need every Medicare dollar we can find. In addition, our 
efforts to resolve this problem will hopefully serve as an 
example for those State Medicaid problems and other third-party 
payers who face similar issues in their reimbursements for the 
costs of drugs. This in turn could result in billions of 
additional dollars in taxpayers' savings beyond those amounts 
that were discussed above applicable only to Medicare.
    There is one more important lesson in all of this. 
Government-run programs such as this, which escape the rigors 
and discipline of the marketplace, inevitably end as expensive 
failures. It is only by forming an honest partnership between 
Government and private sector that we can hope to build a new 
and better Medicare program on a sound financial footing.
    Again, I wish to extend my thanks to all of the witnesses 
who agreed to appear at today's hearing to inform us about this 
serious problem. While I am disappointed that the invited drug 
manufacturers declined to testify today about these practices 
and how the system could be reformed, I am nonetheless 
committed to moving forward on this issue in a positive and 
productive manner with all parties so that we can fix this 
system quickly and protect America's Medicare beneficiaries 
from further financial and personal harm.
    The Chair yields 5 minutes to the ranking member of the 
Oversight and Investigations Subcommittee, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman. Thank you also for 
your opening comments. I think for any of us not to mention 
September 11 would be a mistake. This is, I know, my first 
hearing since then, and I think for all of us on this dais, and 
America and the world changed on September 11, and even our 
work here in a sense has changed. I think if we do everything 
we do in our lives, I think all Americans do everything they do 
a little bit differently, in fact maybe a lot differently 
than--after September 11.
    Let me mention three things and summarize an opening 
statement. The three things in terms of the issue in front of 
us that are most disconcerting, the first issue is there 
appears to be some evidence, and I hope it is developed in the 
course of the hearing, that some manufacturers, by increasing 
the spread on the average wholesale price, have encouraged 
physicians to actually do substitutions on medication. That is 
obviously incredibly disserving from best medical practices to 
best financial incentives for that individual position or 
office, and that is obviously a system which is fundamentally 
broken.
    The second issue, which again is a very disconcerting 
issue, is that for Medicare beneficiaries, as most people are 
aware, their copayments are based upon Medicare reimbursements, 
not on the reimbursement that the physician is paying for the 
drug. So there apparently, again, the testimony, I think, will 
be brought out during the course of this hearing cases, and 
apparently many cases, where the 20 percent copayment is, in 
fact, more than the physician actually paid for the drug, and 
obviously the situation of Medicare beneficiaries, that is an 
absolutely absurd situation.
    As we develop this--and this is part of the problem, and I 
am looking forward to testimony about this as well--is we have 
a situation where we have a reimbursement system which I don't 
think anyone can honestly defend in terms of the average 
wholesale price, but I think we also have a reimbursement 
system on the physicians' side that is hard to defend as well. 
Obviously these two things are related. I guess there is debate 
about how related they actually are, but I think that we need 
to acknowledge that, and we need to do our part in terms of 
fixing it.
    I have a lengthy statement, which I think at this point, 
based on the time, I would rather submit for the record. So I 
will submit that for the record as well as Mr. Dingell has a 
statement and the chairman of the Ways and Means Committee, Mr. 
Stark, also has a statement that they were going to submit for 
the record as well.
    [The prepared statement of Hon. Peter Deutsch follows:]
Prepared Statement of Hon. Peter Deutsch, a Representative in Congress 
                       from the State of Florida
    Thank you, Mr. Chairman, for holding this very important and long 
overdue hearing. For many years, the Inspector General of the 
Department of Health and Human Services--like a voice crying in the 
wilderness--has been issuing reports telling the Department and the 
Congress that the taxpayers were being gouged for drug payments under 
both the Medicaid and the Medicare programs. These federal programs 
were paying providers the published Average Wholesale Price or AWP for 
prescription drugs which was, in truth, far more than the drug 
manufacturers were charging them. The program now has spun so far out 
of control that the annual overpayments may be as high as $1.9 billion. 
We will hear testimony today of a scheme where doctors prescribing 
drugs to be administered in patients' homes wanted a kickback from the 
infusion companies based on the AWP spread over actual cost. The 
Justice Department and numerous states have been investigating this 
situation, and hundreds of millions of dollars have been recovered.
    Only Congress and the reimbursing agency have been silent. In fact, 
we--particularly those on the other side of the aisle who are concerned 
about anything that they think might resemble setting prices--have 
stopped almost every reform effort. We must take steps now to eliminate 
this abuse.
    Over the years, Medicaid at both the federal and state levels has 
been able to get a 15 percent discount from the AWP plus a rebate from 
the manufacturer that can reach up to another15 percent based on the 
reported Average Manufacturers Price or AMP. But drug manufacturers, 
the Medicare carriers, the Centers for Medicare and Medicaid Services 
(CMS) and its predecessor, the Health Care Financing Administration, or 
HCFA, the Congress and the providers have all combined to establish, 
further and abuse the fraudulent Medicare drug reimbursement system. 
The drug companies--who, Mr. Chairman, are notable by their absence at 
this hearing since they were, I believe, the instigators of this 
scheme--reported artificial and false Average Wholesale Prices to the 
public for reimbursement purposes while at the same time not one of 
their customers was paying those prices.
    The Medicare carriers paid those prices and failed their 
responsibility to assure that actual drug prices were being paid. HCFA 
tried to reform the system, but often gave up because of provider 
objections. Congress and the Executive branch also aborted HCFA's 
reform attempts by citing the Paperwork Reduction Act and requiring 
reports from the General Accounting Office before any changes could be 
made. The reports we are receiving today are the most recent mandated 
by Congress in place of real action.
    As we will hear in testimony today and is verified by the documents 
to be placed into the record, the pricing abuses have reached the point 
at which drug manufacturers use the ``spread'' between the AWP and the 
actual price paid as a marketing tool to sell their products. Not only 
does the taxpayer get gouged; so does the Medicare beneficiary who is 
required to pay 20 percent of the total cost of the drug. A chart 
prepared by one of the witnesses provides nine examples in which the 20 
percent copayment covered the entire cost of the drug to the provider. 
A breast cancer treatment costs the provider $450; it charges Medicare 
$1,359. The co-pay is $272; the profit is $909.
    Some of the providers of out-patient drug treatment that we will 
hear from today will say that they are using these excessive payments 
to cover their treatment costs in other areas. They allege that they 
will not be able to continue providing service if this is not remedied. 
If that is true, their arguments and those of other specialities 
suffering from similar under payments should be documented and 
presented to CMS. However, there is a pilot Medicare drug program in 
Texas underway in which competitive drug pricing is used. The costs are 
down, and there is no evidence of the withdrawal of any providers. We 
must also remember that the General Accounting Office has found a 
number of times that there is little or no evidence of under-
reimbursement of providers under either Medicare or Medicaid.
    Mr. Chairman, I look forward to hearing from these witnesses.

    Mr. Greenwood. Without objection, all members' opening 
statements will be submitted for the record.
    The Chair recognizes the chairman of the full committee, 
the gentleman from Louisiana, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Chairman, I, too, want to thank you for the moment of 
silence for the recognition of Lisa Raines and the loss of so 
many friends across America, but also your determination to 
move forward with this important hearing, and I want to 
congratulate the staff who worked with you to develop this 
hearing, which I believe will highlight one of the most 
important abuses within the Medicare system that this committee 
has ever uncovered.
    What you will see today is a situation that has turned Adam 
Smith on his head; a situation which, because of the system in 
which we reimburse physicians for the cost of certain drugs 
particularly in chemotherapy and inhalants and several other 
categories, but the Government of the United States is paying 
in some cases many times the price that the physician is 
actually buying the drugs for. Worse than that, worse than this 
loss of billions of dollars of Medicare dollars that taxpayers 
put up to make sure that our mothers and fathers and 
grandmothers and grandfathers and all our relatives are 
properly cared for in the Medicare health system and in the 
Medicaid system, by the way, worse than this loss of the funds 
that are critical to sustain the program is the fact that the 
patients, those loved ones we protect under this system, are 
being required under this system to put up not 20 percent of 
the cost of the drugs to the doctor, but in one case--and I 
have a chart I want to show you up there, the Medicare 20 
percent copay chart--in one case with a drug called 
Doxorubicin, the patient is putting up not 20 percent, but 200 
percent of the cost. The patient who is supposed to put up 20 
percent is putting up 200 percent of the true cost of the drug.
    Look at the drug etoposide. In that case the patient is 
putting up not 20 percent, but 300 percent of the cost, triple 
the cost the doctor spends on the drug. The poor Medicare 
patient ends up tripling his contribution for the total cost of 
that drug instead of putting up just one-fifth of the cost.
    Look at the drug Leucovorin. It sounds like a character in 
The Godfather, maybe properly named. In that case the Medicare 
patient is putting up 500 percent of the cost of the Medicare 
drug as a copay.
    Look at the column of the Florida Medicare allowable. Look 
at what the doctor is getting back from the Medicare system in 
Florida for those three drugs. The doctor is paying for 
Leucovorin $1.25 for 50 milligrams, and the patient is putting 
up $7.09, and the Medicare system is paying the doctor up to 
$35.47. That is the spread we have been talking about. The 
spread between the real cost of the physician and the cost the 
Medicare system is paying for the drug, and perhaps the copay 
cost the poor patient has to put up, in some cases as high as 
500 percent of the real cost of the drug to the doctor. How can 
we tolerate such a system any longer?
    Mr. Chairman, I really appreciate your uncovering this and 
allowing this hearing literally to go forward when I know most 
people are concerned about us getting back to work too fast. We 
have got to get to work on this one fast. Not only does this 
rob the Treasury and the Medicare fund of billions of dollars 
that should not be paid because they are not the average 
wholesale prices, they are some kind of awful artificial 
wholesale price, but, again, it turns Adam Smith on his head.
    Think about this with me for a second. We introduced 
generic drugs into the system to create competition. Do you 
know what happens to the system when a generic drug comes into 
play? Evidence we have that we will develop today indicates 
that when a generic drug comes into competition with a patent 
drug finally, the price doesn't come down. The price goes up 
because both of the drug companies understand that if they are 
going to sell that drug to the doctor, they have got to give 
them a bigger spread. So they are in competition to give them a 
bigger spread, and they both post higher and higher artificial 
wholesale prices to the Medicare system.
    It is a game that turns ordinary economics on its head. As 
competition comes into the field, prices go up not only to the 
government, but to the poor patient who has to pay not 20 
percent, but 300, 400, 500 percent of the cost of the drug. It 
is a rotten system.
    And, Mr. Chairman, perhaps the most pernicious part of it 
all is the evidence you uncovered with our staff that indicates 
that--at least some evidence that in some cases chemotherapy 
may be dumped into patients in the last 3 years of life because 
there is so much profit to be made. There is so much profit to 
be made on some of these drugs, when that chemotherapy just 
literally rips up bodies and the welfare of those patients in 
the last 3 months of their life, maybe chemotherapy that might 
not be needed. Maybe drugs are being substituted when a better 
drug is available because the drug substituted has a better 
kickback, if you will.
    Now it is time the system be reformed, Mr. Chairman. I want 
to thank you and the staff for uncovering it as much as you 
have. If there was one thing certain about this, it is that the 
responsibility lies in this Congress to straighten it out. We 
permitted this to happen. We have got to straighten it out. And 
I have asked you to do one thing before you went forward with 
this hearing, and that was to be prepared to straighten it out; 
not just to talk about it, not just to make Americans 
understand how rotten the system is and how all the players in 
it hate it as much as I hope we all do now, because we are all 
forced to play this ugly game with one another, but more 
importantly you are prepared to cure it. You and Mr. Bilirakis, 
the chairman of our Health Subcommittee, are prepared to offer 
solutions not next year, but immediately, and I think every 
patient in America who is getting skinned by this system to the 
tune of 500 percent of the real cost of the drug when they 
ought to be paying one-fifth of it, I think they will thank you 
today for doing the Nation a real favor by getting rid of a 
system that robs the American taxpayer, the Medicare system, 
corrupts the system, deprives patients of their critical 
dollars at a time most needed, and in some cases may encourage 
the few, I hope, unscrupulous people to improperly medicate 
people in their worst hours, in their last final hours on this 
Earth.
    I yield back the balance of my time.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Let me begin by thanking Subcommittee Chairmen Greenwood and 
Bilirakis for holding this joint hearing today. I appreciate their 
efforts to highlight the problems that this Committee has uncovered 
concerning Medicare drug prices. I sincerely hope that, by holding this 
hearing, we can begin the process of fixing these problems.
    As Chairman Greenwood has pointed out, the Committee has uncovered 
disturbing evidence that Medicare may be wasting over one billion 
dollars a year, paying unnecessarily inflated prices for drugs. This 
intolerable situation not only affects the finances of the Medicare 
program and the American taxpayer, but also directly impacts the 
finances of America's Medicare beneficiaries.
    We all have parents, grandparents, friends, or neighbors who depend 
on Medicare to help them pay for the small number of drugs that 
Medicare currently covers. It is unacceptable that--because of the 
government's ineptitude in the way it pays for these drugs--our loved 
ones are being forced to pay inflated co-payments for their 
chemotherapy drugs to cure their cancers, inhalation drugs to treat 
their respiratory diseases, and antibiotics to treat their infections.
    The Inspector General's Office at the Department of Health and 
Human Services recently prepared a report for me that shows how, last 
year alone, Medicare beneficiaries paid an extra one hundred and 
seventy seven million dollars in co-payments due to inflated 
reimbursements for Medicare-covered drugs. For example, this means that 
cancer patients are paying an extra $6.56 for each dose of Doxorubicin, 
and an extra $3.01 for each dose of Leucovorin Calcium. These costs 
quickly add up in treatment regimens requiring multiple doses, and 
often can make an enormous difference for somebody living on a fixed-
income.
    Of even greater concern to me is the evidence uncovered by the 
Committee indicating that these overpayments to health care providers 
may be affecting the quality of care received by Medicare patients. 
Patients may not be receiving the most clinically effective treatments, 
due at least in part to the perverse incentives of the Medicare 
reimbursement system. The Committee has learned of instances in which 
the Medicare reimbursement ``spreads'' on certain older, less 
clinically effective drugs were so large that drug manufacturers were 
unable to successfully market improved, more clinically effective drugs 
to health care providers.
    The Committee also has learned that some patients may be receiving 
unnecessary medical therapies--again due at least in part to the 
excessive reimbursements available to health care providers for use of 
certain drugs. Given the powerful effects that these drugs can have on 
patients, we must ensure that no patient receives a particular drug 
regimen for any reason other than to provide the best clinical care.
    Medicare's broken reimbursement system also turns Adam Smith's 
conception of market competition on its head. Only under Medicare could 
a drug manufacturer raise its prices, or at least the ones it reports 
for purposes of government reimbursement, to increase sales. The 
Committee has uncovered evidence that at least one manufacturer has 
done exactly this. Upon learning that a competitor raised its reported 
Average Wholesale Price and thus its Medicare reimbursement spread, 
this manufacturer responded promptly in the same fashion, noting how 
simple it was to change its AWP--something that could be done 
overnight--in order to maintain sales.
    Here's another example of this crazy AWP system at work: an 
internal drug manufacturer document from 1994 discusses the 
consequences of increasing the spread on one of its top drugs, quote, 
``in order to increase the amount of Medicaid reimbursement for 
clinical oncology practices.'' In a particularly blunt assessment, the 
author notes with irony how, quote, ``on the surface, it seems that in 
response to the entrance of a competitor in the market, Glaxo has 
actually raised its price on Zofran--perhaps twice in one year.'' The 
memo goes on to ask: ``How do we explain a single 9% increase in the 
AWP? What arguments can we make to explain to congressional watchdogs 
that we are cost-shifting at the expense of government?'' Despite 
recognizing the troubling issues raised by such a pricing strategy, 
Glaxo succumbed to the system anyway, raising its Zofran AWP two months 
later, while actually lowering the real costs of the drug to providers.
    Medicare also distorts the benefits of the generic drug market. 
Generic drugs hold the potential to decrease pharmaceutical costs 
dramatically, through price competition with brand-name drugs. Under 
Medicare, however, the Committee has uncovered situations in which some 
generic manufacturers competed for market share by raising the prices 
they reported to the government--thus increasing costs to taxpayers and 
patients--while actually selling the drugs to providers at steep 
discounts.
    Today's hearing will highlight these abuses. It is my hope that, by 
bringing this information to the attention of Congress and the American 
public, we can build support for reforming the currently flawed 
Medicare drug reimbursement system. Chairmen Greenwood and Bilirakis 
should be commended for their role in this effort, and I look forward 
to working with them and all the Members of this Committee in solving 
this problem. I believe that Medicare's beneficiaries and America's 
taxpayers deserve no less.

    Mr. Greenwood. I thank the gentleman for his comments and 
cooperation and support in this project and inform the chairman 
that it is our intent to have legislation included in an 
omnibus--whatever omnibus appropriations bill is finally 
adopted by the Congress that will fix this system soon.
    The statement of the ranking member of the full committee 
has been entered into the record, and with that the chairman 
then turns to the ranking member of the Health Subcommittee for 
5 minutes.
    Mr. Brown. I thank the chairman. I thank both Chairman 
Bilirakis and Chairman Greenwood for holding these hearings.
    A recent poll conducted by Pew Research Center told us that 
Americans are finding it difficult to reengage in their daily 
lives after the heart-breaking events of last week. We 
certainly didn't need a poll to tell us that. I think most 
people in this room are struggling, as all of us up here are, 
to regain our footing and return to their lives despite the 
anger and sense of loss that has paralyzed in some sense many 
of us. But I think most of us also feel it is time to get back 
to work.
    Staggering prescription drug costs are still pushing 
retirees deeper into poverty. Forty-four million Americans are 
still uninsured, and that number pretty clearly is rising. The 
uncertain economic climate makes it more important than ever to 
fortify the Nation's core public programs, Medicare, Social 
Security, Medicaid, our public health infrastructure.
    Our job today is to look at some shady dealings between 
drug companies and the Medicare program. The Medicare program 
and Medicare beneficiaries are being scammed to the tune of 
$800 million annually. Some drug companies mark up their prices 
before reporting those prices to Medicare. What do the drug 
companies gain from this deception? They gain a higher volume 
of sales. What do doctors gain from this? They gain a healthy 
margin in the drugs they administer to Medicare beneficiaries. 
What do Medicare beneficiaries gain? They gain significantly 
higher out-of-pocket cost when the copayment is artificially 
inflated. Medicare pays more than it should, Medicare 
beneficiaries pay more than they should, and doctors not only 
receive higher reimbursements than they should, they have an 
incentive to overtreat patients. There is evidence that a few 
doctors actually take the bait and administer more medication 
than is necessary.
    When you think about the type of drugs Medicare currently 
covers, chemotherapy, immunosuppressives, respiratory therapy 
drugs, other medications for serious, serious illness, it is 
truly disturbing to think that any doctor would compromise the 
Hippocratic oath in this manner. On the face of it, the so-
called average wholesale price scam looks like a textbook case 
of fraud, waste and abuse. AWP is a bit like the Holy Roman 
Empire we learned about in school. The Holy Roman Empire to be 
sure was not holy, and it wasn't really Roman, and you could 
hardly call it an empire. It is the same with the average 
wholesale price. They aren't the average of anything, they 
certainly aren't wholesale, and, in fact, they aren't even 
prices. They are a marketing tool.
    Unfortunately in some cases the excess Medicare spending 
appears to compensate for inadequate Medicare reimbursement. 
That makes the job of this subcommittee or both subcommittees 
and this committee more difficult. Not only do we have to 
figure out how much to pay for these drugs, we have to figure 
out how and how much to pay providers who are not receiving 
adequate reimbursement for administering these drugs.
    But there are also opportunities here. When we look at how 
to pay appropriately for this limited set of prescription 
drugs, we should also think about how to pay appropriately for 
all prescription drugs. We can tell that the prices Medicare 
pays are artificially inflated across the board, in the 
majority of cases are artificially inflated, by comparing them 
to the prices other U.S. Purchasers, large HMOs, the VA, 
certain big hospitals that other U.S. Purchasers pay. We can 
tell that the drug prices that American consumers pay are 
artificially inflated by looking at the prices consumers in 
other countries, in other developed wealthy countries, pay.
    Consumers, employers, and other purchasers in the United 
States pay two, three, sometimes four times more than their 
counterparts in every other developed country in the world for 
prescription drugs. As a Nation we are the worst equipped to 
weather artificially inflated drug prices. Every other 
developed country has universal health insurance. We have 44 
million uninsured individuals under age 65. We have 12 million 
Medicare beneficiaries who have no prescription drug coverage.
    Mr. Chairman, we have a lot of work to do. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for his opening statement the chairman of the 
Subcommittee on Health, Mr. Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman. I, too, would like 
to thank you for raising and staying with this issue 
surrounding this current system of Medicare drug reimbursement 
which has resulted in this joint hearing. The Health 
Subcommittee has spent a considerable amount in this Congress 
examining how best to add a comprehensive prescription drug 
benefit to the Medicare program. This hearing builds off the 
work that began in the last Congress where we examined the 
reimbursements for the limited drug coverage currently 
available in the Medicare program.
    I would like to welcome and thank our witnesses, including 
Tom Scully from CMS and Bill Scanlon from GAO. We rely on these 
government officials for factual information and detailed 
analyses. I also would like to welcome Mr. Zachary Bentley from 
my home State of Florida, the southern part, and I know your 
testimony, Mr. Bentley. All the witnesses will help inform the 
committee and the public about the issues regarding Medicare's 
current reimbursements to health care providers for certain 
drugs used to treat patients.
    The Medicare program currently provides coverage for a 
small number of drugs, as we know, much too small, but a small 
number, limited principally to those that are administered 
incident to physicians' treatment or in conjunction with 
covered durable medical equipment such as inhalation drugs used 
with a nebulizer. Since at least 1992, Medicare has determined 
the appropriate reimbursement price for these covered drugs by 
referring to an industry trade publication known as the Red 
Book, which looks at what manufacturers purport to be the 
average wholesale price for their drugs. Since 1977, providers 
who administer these drugs to Medicare beneficiaries have been 
reimbursed for their cost at prices equal to AWP, average 
wholesale price, minus the 5 percent. Of this set amount, 
Medicare Part B covers 80 percent--this has all been said, I 
realize--while Medicare beneficiaries can be required to pay 
the remaining 20 percent as copayment.
    Today's hearing will examine how Medicare's current 
reimbursement system for the relatively few drugs that are 
covered is costing beneficiaries and taxpayers more than is 
necessary and maybe having an adverse impact on the health of 
some of our most vulnerable citizens.
    I recently toured, Mr. Chairman, Clearwater Oncology Center 
in my Florida district, and I am sure we are all aware of what 
great work oncologists do and how important they are to us and 
just to all Americans. At the request of my constituent Dr. 
Marcus Chopart, I would like to admit this white paper prepared 
by U.S. Oncology, which is entitled Reimbursement Versus 
Reality, into the record and ask unanimous consent for that.
    Mr. Greenwood. Without objection.
    [The following was received for the record:]
                       Reimbursement vs. Reality
    a us oncology discussion paper on medicare payments for cancer 
                               treatment
Introduction:
    Today, the Medicare program makes a significant and well-recognized 
overpayment for oncology drugs. The program also makes a nearly 
equivalent but less well-recognized underpayment for practice expenses 
associated with the delivery of cancer care. This paper is intended to 
discuss the causal factors and current experience of this practice 
expense underpayment. It is offered in the hope of furthering the 
public policy discussion and the cancer community's longstanding 
support for balanced reform, which will address Medicare's overpayment 
of drugs and underpayment of services. In this manner, the Medicare 
program will provide a stable source of adequate reimbursement for 
cancer care supplies and services and preserve patient access to 
community-based cancer services.
Discussion:
    Medicare practice expense reimbursement for chemotherapy 
administration was established to accommodate a delivery system profile 
that no longer exists in the US. Whereas most chemotherapy was 
administered in hospital settings as recently as the late 1980s, 
Centers for Disease Control and Prevention (CDC) data currently 
indicate that more than 80 percent of all chemotherapy treatment 
encounters occur in non-hospital outpatient settings (freestanding 
oncology physicians' offices and community cancer centers). 
Reimbursement policy changes, managed care cost-saving pressure, 
patient preference, the advent of more effective ambulatory therapies, 
and the advanced capability of freestanding facilities to provide 
highly-complex care are the major causal factors that fueled the 
migration of patients from hospital to non-hospital settings.
    This historical perspective is important because it helps to 
explain the flaws plaguing the Medicare program's practice expense 
reimbursement policy for cancer care. When the Resource-Based Relative 
Value Scale (RBRVS) was established in 1992, the Practice Expense (PE) 
components within the RBRVS were based upon historical ``usual and 
customary'' physician fee schedule systems that evolved at a time when 
most chemotherapy was administered in hospitals. As a result, 
reimbursement levels for the RBRVS codes relating to physicians' 
offices and other freestanding facilities were based on the few 
resources that were used in those settings during the period preceding 
the RBRVS implementation.
    The evolution of cancer care and the resulting reimbursement 
discrepancy described above has long been recognized by Congress and 
HCFA/CMS. For example, after it became clear in the mid-1980s that 
chemotherapy was moving to freestanding facilities, Congress required 
the Secretary (in section 4055(d) of OBRA 1987) to study and report to 
Congress on possible Medicare reimbursement changes to more accurately 
reflect the costs associated with providing chemotherapy in physicians' 
offices. HCFA subsequently published a notice in the Federal Register 
that recognized that Medicare payment for chemotherapy administration 
may be inadequate:
          ``Changes in treatment methods and advances in technology now 
        allow chemotherapy to be furnished to many patients in the 
        physician's office, thus reducing the need for hospitalization 
        to administer chemotherapy. Furnishing these services in the 
        physician's office is more convenient for some patients and may 
        provide other benefits as well.
          ``Current Medicare Part B payment rules for physicians' 
        services, however, may fail to compensate adequately for these 
        services because the usual reasonable charge methodology may 
        not fully recognize the overhead costs involved in these 
        procedures. Some sources of additional costs include employment 
        of nurse oncologists, special patient rooms, and safety 
        equipment required because of the toxicity of the 
        chemotherapeutic agents and safety procedures issued by the 
        Occupational Safety and Health Administration.''
    Unfortunately, this recognition has never been translated into more 
accurate Medicare reimbursement for cancer care services. As a result, 
inadequate and inaccurate payment levels have been utilized since the 
creation of RBRVS, with updates for inflation but without any 
significant revision, even though the locus of non-surgical cancer care 
has moved from hospital settings to freestanding physicians' offices 
and community cancer centers.
    In other words, the resource-based codes currently used by Medicare 
to reimburse for oncology practice expenses do not reflect the transfer 
of resources from hospitals to freestanding facilities and the 
additional costs that have arisen consistent with advances in and the 
complexity of today's more effective treatment regimens. Put another 
way, hospital care and complex services moved to freestanding 
facilities--but Medicare's practice expense reimbursement policy has 
never been significantly and continuously updated to reflect that fact.
Summary Points:
    The implications of the above can be identified through examination 
of the many instances of shortfall which exist between the delivery and 
reimbursement of cancer care in freestanding facilities. The following 
bullet points summarize just a few of these:

 Today, nursing and pharmacy time comprise the principal 
        components of the direct labor costs of oncology practice 
        expenses (PEs). However, the allocation of values and minutes 
        within the CPT codes does not match the actual cost and 
        duration of nursing services and does not address pharmacist 
        and pharmacy technician labor and related medical supplies and 
        quality control processes. For example, CPT 96410 (first hour 
        of chemotherapy infusion) does not adequately reimburse for the 
        actual costs of the activities which currently fall under the 
        definition of that code. In addition, activities which need to 
        be performed in the care of a typical patient often exceed 
        96410's 121 minute estimate of total nursing time. This is a 
        commonplace problem in oncology due to:
     The compromised physical and mental condition of many 
            seniors with cancer,
     The complex procedures integral to the care provided to 
            all cancer patients undergoing chemotherapy treatment (for 
            example: patient assessment prior to chemotherapy 
            administration, evaluation of laboratory data such as blood 
            counts and renal and liver functions, calculation of drug 
            dosages based on body surface areas to prevent medication 
            errors, insertion of intravenous or central venous catheter 
            devices, continuous monitoring to address potential adverse 
            reactions, a variety of assistive care activities, and 
            hazardous materials preparation and disposal).
     The amount of patient and family member training required 
            due to the delivery of outpatient rather than inpatient 
            care, the complexity of care provided, and the side effects 
            and potential complications associated with multi-drug 
            agent chemotherapy regimens,
     The time-intensive nature of patient care-related follow-
            up and monitoring required due to the life threatening side 
            effects and complications routinely experienced by cancer 
            patients during a typical chemotherapy protocol, and
     The recently-established standard of practice in which 
            pharmacists and pharmacy technicians are utilized within 
            cancer care facilities to enhance the safety of the drug 
            administration process. As the recent Kansas City 
            experience clearly demonstrates, on-site skilled pharmacy 
            services are integral to the delivery of safe and effective 
            cancer care.
 Medicare utilizes chemotherapy administration codes published 
        in the AMA's Current Procedural Terminology (CPT) manual but 
        applies rules that differ from the CPT's descriptions. For 
        example:
     Medicare only allows code 96408 (administration by push 
            technique) to be reported once per day for a patient 
            regardless of the number of drugs administered by push. 
            Many treatment regimens require the administration of 
            multiple drugs, however, some of the most common of which 
            are vesicant. Drugs classified as vesicant are agents that 
            will cause serious tissue damage (including potential loss 
            of limb) if they leak into the tissues of the patient's 
            hand or arm; as a result of the potential for this serious 
            complication, the administration of vesicant drugs requires 
            prolonged one-on-one nursing care. As a result, caregivers 
            routinely bear significant multiple push and specialized 
            care costs that are not adequately reimbursed under current 
            practice expense policy.
     CPT 90784 (intravenous push of therapeutic medication) is 
            a code that was established to cover the costs of 
            administering non-chemotherapy agents such as anti-nausea 
            medications, anti-sensitivity drugs, and steroids. Despite 
            the intention that code 90784 provide reimbursement for 
            therapeutic agents and despite the fact that such agents 
            are often a necessary component of a chemotherapy regimen, 
            Medicare will not make a payment for 90784 activities that 
            are undertaken on the same day as the infusion of a 
            chemotherapeutic agent.
        CPT 96410 includes a general description of the service (first 
            hour of chemotherapy administration). Based upon that 
            description, CMS' Clinical Practice Expert Panel (CPEP) 
            process has estimated a time allotment of 121 minutes, an 
            allotment included in published Medicare payment policy. 
            However, actual Medicare reimbursement does not currently 
            cover 121 minutes of nursing time and instead provides for 
            a payment level that covers just an estimated 20 percent of 
            costs associated with 96410.
 Current Medicare practice expense reimbursement for oncology 
        either does not take any account of a wide variety of 
        activities which are common and integral to the delivery of 
        cancer care in freestanding facilities or allocates 
        significantly insufficient minutes and resources to them. For 
        example:
     Triage and patient/family education, which consumes an 
            estimated 25-40 percent of a typical oncology nurse's day 
            (versus the 15 minutes now allocated by Medicare) and 
            involves frequent and lengthy phone interaction with the 
            patient and/or the patient's family support person,
     Tumor registry-related activities (required by most state 
            health departments and managed by the Centers for Disease 
            Control and Prevention),
     Clinical research-related activities (recently approved 
            for Medicare coverage but currently lacking any PE 
            adjustments for the significant labor adjustments required 
            due to the data intensive nature of the clinical research 
            process),
     On-site pharmacy-related activities (increasingly becoming 
            the standard of practice due to the increasingly complex 
            nature of new chemotherapy drugs and biotechnology agents 
            and due to the necessity to free up oncology nurse time in 
            light of the national shortage of trained nurses),
     Biohazardous waste disposal (including federally-mandated 
            disposal systems and required monitoring of disposal by 
            specialized vendors in federally approved disposal sites), 
            and
     Financial counseling and financial aide assistance 
            (requiring an estimated 10-20 percent of a typical oncology 
            nurse's day due to the aggressive denial of benefit 
            standards-of-practice within the insurance industry and by 
            Medicare intermediaries).
 As a result of the scope of services that are not currently 
        being reimbursed or that are inadequately reimbursed, oncology 
        nurses estimate that a majority of their time is devoted to 
        activities that are not currently ``billable'' (i.e. considered 
        within the components of the various CPT-4 codes) under 
        Medicare. Of those activities which can be billed today, the 
        vast majority are reimbursed at levels that are far below the 
        actual cost of undertaking them (at levels estimated to be less 
        than 20 percent of actual costs reimbursed).
 Current Medicare practice expense reimbursement for oncology 
        does not take into adequate account a wide variety of 
        processes, supplies and equipment which are common, frequently 
        mandated by federal law or regulation, and integral to 
        freestanding facilities. For example:
     Hepa-filter equipped hoods for admixture (to prevent 
            exposure and contamination),
     Safe-needle systems (to prevent caregiver needle sticks),
     Biohazardous waste containers (to prevent exposure and 
            contamination),
     Reinforced gowns and gloves (to prevent exposure and 
            contamination),
     Specialized devices required to access implantable central 
            venous ports to safely administer toxic chemotherapeutic 
            agents and reduce the complications (especially life 
            threatening infections) associated with frequently repeated 
            intravenous drug administration processes,
     Business and clinical record audits and internal reviews 
            required to ensure compliance with billing regulations as 
            recommended by the OIG Guidelines For Medical Practices, 
            and
     Business and clinical record audits required by the FDA, 
            OIG, and Medicare intermediaries associated with standard 
            of care procedures and drugs utilized in the clinical 
            research process.
 In the late 1990s, Medicare practice expense components were 
        made resource-based, a process which presented an opportunity 
        for the inadequacy of drug administration payments to be 
        addressed:
     HCFA initially pursued an approach that would have 
            increased payments to cover costs; the Agency adopted a 
            ``bottom up'' approach under which clinical practice expert 
            panels (CPEPs) were formed to estimate the staff time, 
            supplies, and equipment used in each service.
     Because the bottom up methodology would have resulted in 
            significant shifts of Medicare payments among various 
            specialties, however, legislation was enacted that 
            postponed implementation of the resource-based practice 
            expense components for one year and specified new criteria 
            for HCFA to consider in adopting a methodology.
     As a result, HCFA changed to a ``top down'' methodology, 
            which resulted in the preservation of the status quo.
 On November 1, 2000, HCFA published the final rule for the FY 
        2001 physician fee schedule that also presented an opportunity 
        for the inadequacy of drug administration payments to be 
        addressed:
     HCFA accepted and published recommendations made by the 
            American Medical Society's Relative Value Update Committee 
            (RUC) and Practice Expense Advisory Committee (PEAC) for 
            CPT codes 96408 and 96410. [42 CFR Parts 410 and 414, 
            65392-65393]
     In its rule, HCFA stated ``We will now use the RUC-
            recommended total times of 102 minutes of clinical staff 
            time for CPT code 96408 and 121 minutes for CPT code 
            96410.'' HCFA also posted a complete database on its 
            website (http://www.hcfa.gov/stats/resource.htm) that 
            provided dollar values (inclusive of direct and indirect 
            expenses) for the updated codes, as follows:

------------------------------------------------------------------------
                                  Published                    Percent
                                    Value     Actual Value   Difference
------------------------------------------------------------------------
96408..........................       183.67        37.11          495%
96410..........................       267.05       59.684           47%
------------------------------------------------------------------------

     Despite being accepted and published by HCFA in its final 
            rule, the significant increases were not adopted into the 
            Medicare program's actual payment levels.
 For codes lacking a physician work value (such as all 
        chemotherapy administration codes), HCFA adopted a methodology 
        in which a special ``zero work value pool'' was created. HCFA 
        has never published an explanation of this methodology, but the 
        pool reportedly is assigned dollars based on the practice 
        expenses per hour of the average physician, and non-physician 
        time for each procedure is substituted for the physician time 
        that would otherwise be used.
     As a result of this methodology, Medicare payment amounts 
            were kept at approximately the same levels as existed prior 
            to the institution of the resource-based system (in fact, 
            it has been suggested that HCFA selected this methodology 
            to maintain the status quo in payment amounts).
 Medicare pays a ``bad debt credit'' to offset uncompensated 
        care provided by hospital settings but does not currently have 
        any provision for such a payment to freestanding facilities 
        (which provide the majority of uncompensated chemotherapy 
        services to Medicare beneficiaries who cannot meet their 
        coinsurance obligation, among other needy patients).
     According to the Medical Group Management Association 
            (MGMA), the typical physician office setting experiences a 
            non-collection rate equivalent to 7.5 percent of allowable 
            reimbursement.
     In many community-based cancer care facilities--where a 
            large segment of the Medicare patient population is 
            dependent upon Social Security as a main source of income--
            non-collection levels may be much higher than MGMA's 
            estimate.
 A number of activities and infrastructural resources are 
        needed to operate an efficient and compliant oncology office. 
        However, many of the costs associated with those activities and 
        resources are not currently reimbursed. As a result, additional 
        practice expense allotments or reasonable returns on services, 
        products, and other resources are needed to: attract and retain 
        staff (due to the inadequacy of current practice expense 
        reimbursement); invest in facilities, therapy inventories, and 
        required diagnosis and treatment technology; finance accounts 
        receivable; invest in information and operational systems to 
        meet NCI/FDA clinical trial research data requirements; retain 
        outside compliance advisors and auditors; and meet HIPPA 
        regulatory requirements.
Conclusion:
    It is our hope that this information will be helpful as Congress 
and the Administration seek to address the disparity between typical, 
necessary practice expenses and the reimbursement currently provided 
under the Medicare program (and, as a consequence, by private payers). 
It is also our hope that a clear focus on the nature, complexity, 
resource intensity, and technological advances of community-based 
cancer care--as well as the reliance by the vast majority of Americans 
with cancer on care provided in community-based settings--will lead to 
an updating of Medicare practice expense reimbursement to accurately 
reflect the realities of cancer care delivery today.

    Mr. Bilirakis. This will prove to be a lengthy hearing, and 
thus I am limiting my opening statements so we may get to the 
important testimony of the witnesses, who, again, I thank for 
their efforts and cooperation. Thank you, sir.
    Mr. Greenwood. I thank the gentleman and thank him also for 
limiting his remarks. I will ask if the opening statements of 
the Members could be limited to 3 minutes, and all opening 
statements will be entered into the record.
    The Chair recognizes for the opening statement the 
gentleman from New Jersey Mr. Pallone.
    Mr. Pallone. Thank you, Mr. Chairman, and I want to thank 
you both, you as the Oversight Chairman and also Mr. Bilirakis 
as the Health Subcommittee Chair for holding this hearing.
    The issue on the table today critically analyzing the 
marketing practices of drug companies will show the immense 
amount of fraud perpetrated on the taxpayers and the senior 
citizens of this country. I along with all of my colleagues 
condemn practices that raid the Federal Treasury of at least 
$800 million annually. Further, I am particularly outraged at 
the impact of this pervasive fraud on Medicare beneficiaries by 
massively increasing the dollars coming out of pocket to cover 
the drug costs of sick and dying seniors as a result of the 20 
percent copay overcharges.
    Mr. Chairman, the GAO, the HHS, inspector general, and some 
particularly well-informed whistleblowers will testify today 
and leave no doubt that this system is broken and that the 
people who can least afford the cost, our seniors, are the 
primary victims.
    Let us take a look at the winners and losers in the way 
HCFA pays for the few outpatient drugs that Medicare covers 
under Part B. The winners are obvious. They are the brand name 
drug companies and some unscrupulous physicians that administer 
the chemotherapy and other infusion drugs in their offices. 
There have been some discussions that generic competition is 
the cause for the broken system, but make no mistake, it is not 
independent generics, but rather the brand name firms that are 
the root cause of this fraud.
    The companies named publicly in news stories as having pled 
guilty to crimes are under active investigation. In addition, 
Mr. Chairman, the competition is not always among drugs that 
the FDA says are generic equivalents. The competition is also 
among brand name drug companies that go to great pains to claim 
that their products are not therapeutically interchangeable.
    Documents which will be introduced at this hearing will 
show that the salesmen peddling these drugs were not arguing 
that their medicine was therapeutically superior to the 
competition, but rather the internal company documents make 
clear the field of battle was who could misrepresent their 
prices more outrageously to Medicare so as to provide the 
fattest profit. There are some greedy doctors, of course, who 
pocket sums approaching a million dollars, and they are 
obviously making a lot of money; however, it is the drug 
companies' fraud that makes the money possible.
    The Medicare reimbursement system is flawed, clearly, but 
no law, no regulation, no guideline issued by HCFA or any other 
government agency directed drug companies to commit fraud. Just 
because a system can be gamed doesn't provide any person or any 
firm with the right to defraud the government or their fellow 
citizens, and the proof of that is that not all drug companies 
played this game. Some chose to compete only on traditional 
terms, and I certainly commend them for that. Unfortunately, at 
least in segments of the market, the honest firms were the 
exception and not the rule, and I find that very tragic.
    Thank you very much, Mr. Chairman.
    Mr. Greenwood. I thank the gentleman and recognize the 
gentleman from Florida Mr. Stearns for his opening statement.
    Mr. Stearns. I thank the chairman, and I also want to thank 
Mr. Bilirakis for all the work he is doing on this hearing, 
too. And, of course, I want to thank Administrator Scully for 
coming here with Deputy Inspector Grob and Director Scanlon for 
their dedicated analysis. And perhaps this is a quagmire that 
they can help us out of by suggesting legislation, what we 
should do.
    This is sort of an embarrassing thing to be here, this many 
people. Obviously when I see a lot of people like that, there 
are pocketbooks involved here, but we have got to do something, 
and as Chairman Tauzin mentioned, we cannot sit here and let 
this continue. I almost think there is moral obligation to go 
back and try to rectify this. No one is talking about all the 
American citizens who have paid all this money and have paid 
too much, and it is out of their pockets, and it has gone in 
the wrong directions, and it is difficult to go back in 
retrospect and try to come back with something to rectify this 
but just move forward. Maybe that is all we can do.
    I also want to thank Mr. Zachary Bentley from my State of 
Florida. I know it is a little difficult for him to come up 
here with airline travel, so I appreciate his efforts in coming 
up here.
    This is a very thorny question, reimbursing for drugs. Who 
would have thought that when Medicare started, that you would 
actually be doing a lot of the caring for patients in 
outpatient clinics? I had the opportunity to visit and to tour 
an oncology center in my hometown of Campbell, Florida, and it 
is very satisfying to see patients cared for in this outpatient 
clinic. The drugs are administered by nurses and doctors, and 
these patients have their family right there. It is an informal 
situation, but all the while this is happening and they are 
administering these drugs and taking care of them, obviously 
the question they brought to my attention is that Medicare is 
overpaying for drugs, but underpays for services associated 
with the administration of therapies. So this is a very poor 
accounting practice.
    It is immoral what we are doing. It is unsettling to 
patients, and many patients, as the chairman has pointed out, 
are paying 300 and 500 percent in their copayment. This cannot 
be tolerated, and, Mr. Chairman, I commend you for your hearing 
today, and your commitment to do legislation is very important.
    Finally, it is hoped that whatever drug reimbursement 
system is employed, it should not impose burdensome accounting 
requirements on the medical facilities and providers. So 
whatever we do, let us try to rectify the problem without 
creating another overlay of government upon government with 
some kind of accounting procedure. Remember, the caregivers who 
take care of patients with cancer and all these respiratory 
problems and devastating illnesses are healers. They are not 
bean counters. They don't want to spend the rest of their life 
filling out government forms to rectify this problem.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentlelady from California Mrs. Capps.
    Mrs. Capps. Thank you, Mr. Chairman.
    Obviously for most of us our thoughts are elsewhere today. 
They are in New York, at the Pentagon, in the homes of the 
families across America who have lost loved ones in last week's 
terrible events. I think especially of Lisa Raines, so closely 
involved with many in this room today. Those events and their 
ramifications will certainly be with us for a long time, and 
clearly we need to spend significant time on our Nation's many 
responses to them.
    But I am very pleased that at this time this committee is 
making an effort to continue its business. Although the attacks 
have changed many of our priorities, we still must address 
Medicare and Medicaid and other issues that may seem mundane in 
comparison.
    So I want to direct my attention to the issue at hand. It 
is very disheartening to learn about efforts to take advantage 
of our Nation's seniors and America's taxpayers. And clearly if 
what we have been told is true, that is what has happened. 
Pharmaceutical companies have worked to increase their profits 
by artificially raising the Medicare reimbursement rates for 
certain prescription drugs, particularly oncology drugs. 
Sometimes this happens to the point where our beneficiary pays 
more in his or her copayment than it costs to buy the drugs 
outright. Clearly, given the current budget situation, Medicare 
cannot afford to be paying too much for the services and 
prescription drugs, and certainly our seniors are already too 
strapped to afford most of their prescription drugs. To take 
money from their already overextended pockets this way is 
terrible.
    It is even worse that this is being done with something as 
important as oncology drugs. People suffering from cancer 
should not be the target of anyone trying to make a profit. 
Many provider groups are arguing that their reimbursement rates 
for the services they provide are too low, and they need the 
surplus payments to cover extra costs. It is true that 
reimbursement rates for certain services are too low. This is 
certainly true for oncology nursing, which I know from personal 
experience is essential to cancer treatment. In fact, last year 
I taped a message for a video about the importance of oncology 
nursing and nurses and the need to improve their rates of 
reimbursement. But I want to make it clear that just because 
these rates are too low does not mean it is all right for other 
rates to become too high.
    Congress and the Centers for Medicare and Medicaid Services 
need to act now to end this practice. We need to make sure that 
Medicare is neither overpaying nor underpaying for any 
services. To do otherwise threatens the very stability of 
Medicare and the ability of our doctors to provide important 
health care. We must stop the gouging of our seniors and 
constituents by drug companies looking to gain a little market 
share.
    Mr. Chairman, I am glad you are holding this hearing, and I 
look forward to working with you in the future.
    Mr. Greenwood. The Chair thanks the gentlelady and 
recognizes the gentleman from Georgia Mr. Deal for an opening 
statement. Mr. Deal's not here.
    Dr. Ganske for an opening statement.
    Mr. Ganske. Thank you, Mr. Chairman.
    I think it is important to have this hearing. We need to 
look at the concept of the average wholesale price. In my mind 
the question is, is it the wrong concept for us to be using in 
terms of reimbursement, or is the information-gathering and the 
actual way that it is being implemented wrong, and does that 
need to be improved?
    We have to remember that we are not just talking about 
Medicare, we are talking about Medicaid and also proposals to 
provide prescription drug coverage for Medicare recipients. I 
have a proposal, for instance, that would extend Medicaid 
coverage to the neediest, and so I think that--and the way the 
AWP has done is important. We need to address issues of 
potential fraud.
    But I want to say this: This last Sunday I gave a speech at 
my church on September--about the events on September 11, and 
it was pretty emotional, but it was especially emotional for me 
because I sat next to my former district staff director, who 
has advanced lung cancer and is getting chemotherapy. And I 
will tell you, Mr. Chairman, it makes me rather angry to hear 
people sit up here and pontificate about the motives of the 
physicians who are taking care of Luke. What is medical 
necessity in his case? Some of the things that I have heard 
would indicate that we questioned the motives of the doctors 
who are taking care of him because they can't cure him, but 
they are giving him chemotherapy that may give him a couple 
extra months of life. I would ask my colleagues how much is 
that worth?
    So let us get away from some of this rhetoric up here about 
the motives. Let us talk some of the facts. Here is a fact. 
When Luke goes in for chemotherapy, his doctor is paid $62 for 
the administration of that chemotherapy. Just the cost of the 
nursing help is probably over $100. We are not even talking 
about if he is a Medicare patient. We are not even talking 
about the cost of the overhead. It is likely that the cost for 
that physician to administer that type of chemotherapy for a 
Medicare patient, reimbursement by Medicare is less than one-
half, maybe less than one-fourth of what the actual costs are, 
and that isn't even taking into consideration the amount of 
time for the personnel and the physicians involved with the 
multiple phone calls that chemotherapy patients put in to a 
physician's office.
    So when we're talking about this threat, let us also talk 
about the threat in Medicare and the totally inadequate payment 
of Medicare services for this, because this is really 
important. If this isn't addressed, then those Medicare 
patients ultimately will not get the type of care that they 
need, like my friend needs right now.
    So let us look at fixing this AWP. Maybe it can be fixed. 
Maybe we can prevent some of the problems. But you know what? 
I'd have to say this. If a Medicare HMO negotiates a discount 
with a pharmaceutical company and thereby increases its 
profits, is that fraud? Should we be looking at that?
    My suggestion is this: Why don't we get the actual data on 
the average wholesale price. Let us collect the slips and find 
out what the pharmaceuticals are actually charging and being 
paid. I would predict then that you will see, when you get a 
more accurate AWP, you'll see some changes in that, in those 
amounts, and you'll then get a more accurate index of what, for 
instance, the reimbursement truly ought to be for the physician 
services.
    So, Mr. Chairman, I think it's a pretty important hearing, 
and I would just ask my colleagues to look at this in a 
rational way. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman and assures 
the gentleman that it is our intention to make sure that 
oncologists and all providers are adequately compensated--
appropriately compensated, and, in fact, it will be the 
testimony of the General Accounting Office that will give us 
the facts that we need to determine what that reimbursement 
should be.
    The Chair recognizes for an opening statement the gentleman 
from Texas Mr. Hall.
    Mr. Hall. Mr. Chairman, thank you, and I think Mrs. Capps 
really hit the nail on the hit when she talked about 
priorities, because we all have priorities, and I think it is 
great of this chairman and the ranking member to hold this 
hearing in the midst of all the anxieties that the people have 
all across this country.
    This is very important, and I suppose if I could say 
anything to add to the opening statements that's been made, it 
would be that I'd like to see us come together, not slapping 
one another around, but to come together to solve these 
problems, Medicare, Medicaid, Social Security, the needs that 
the people have out there, and come together as closely as 
we're together after the President's speech last night on 
foreign affairs and offense and defense. That is what is really 
needed.
    I'm very interested in the studies that have been made by 
GAO and CMS. I hope they're on current data on costs for 
physicians, particularly in chemotherapy, because in my family 
I have that problem, have had that problem to one very dear to 
me. We've all--we are all what our experiences are. But I think 
the very fact that we have all these empty seats here indicates 
that we are in a busy time, in an anxious time, and I thank you 
for having this hearing.
    I support the hearing and the things that we're going to 
have here, and I'd make a request, if it has not already been 
made, that we be allowed to submit questions and leave them on 
the record to have their answers put into the record to where 
the rest of the Congress and the rest of the Nation might have 
the benefit of this hearing, and I yield back my time.
    Mr. Greenwood. Without objection, questions posed by 
members of the committee will be included in the official 
record.
    The Chair now recognizes the gentleman from Pennsylvania 
Mr. Pitts for his opening statement.
    Mr. Pitts. Thank you, Mr. Chairman. I want to commend you 
and the staff and the whistleblowers for uncovering this 
serious abuse in the Medicare drug reimbursement system. The 
system deeply is in need of reform, and I want to thank you for 
holding this important hearing. I look forward to hearing from 
your distinguished witnesses today. Thank you. I yield back.
    Mr. Greenwood. The Chair recognizes the gentleman Mr. 
Stupak for an opening statement.
    Mr. Stupak. Thank you, Mr. Chairman. I'll waive my opening 
statement. Just thanks for having this hearing. I look forward 
to the testimony we're going to hear today.
    Mr. Greenwood. The Chair recognizes for an opening 
statement the gentleman from Georgia Mr. Norwood.
    Mr. Norwood. Thank you, Mr. Chairman.
    I wonder if I could identify who developed that slide while 
I'm beginning my opening statement so we can know who to talk 
to about it and try to understand it. But I do thank you for 
holding this important hearing this morning, and in the 
interest of time, I'm going to try to be brief.
    It is clearly obvious that CMS needs to be in a responsible 
way paying for drug therapies that it does cover under 
Medicare, and if CMS is overpaying, then that problem needs to 
be corrected, period, now. If there is fraud in any way 
occurring with the AWP, that problem needs to be corrected now.
    But the tone of the hearing is one in which I think we 
ought to be a little concerned about, and I'll spend my time 
talking about that. If our effort here is to try to find 
somebody to blame or scapegoats, we need to look, I believe, at 
other obvious points and the bigger picture that might be 
leading to some of these type of things.
    I don't think it's a joke or anybody misunderstands that 
Medicare significantly underpays providers for many services, 
and you may not believe me or Dr. Ganske or Dr. Coburn or 
others who have been saying for years that is the case, and it 
is getting worse and worse, but it is the case, whether you 
believe us or not.
    I don't think we need to pat ourselves on the back today 
and think we're making real progress on this one particular 
problem through this hearing, because the truth of the matter 
is we are still ignoring the fundamental problem of Medicare. 
Health care costs money, folks, and it is hard to understand 
sometimes why--when a patient is dying, perhaps the oncologist 
is continuing to inject that patient to buy them a few more 
months or weeks or make their life a little bit better.
    Now, maybe we don't want to pay for that. Maybe we want to 
say that we don't want to pay for that, but let us be honest 
with our constituents. Let us be honest as a government entity. 
If we don't want to pay for that or can't, for pity sakes, 
stand up and say so. Don't try to find a scapegoat to blame.
    Now, I don't understand the slide in the back of the room. 
I have a hunch the implication there is that, for example, 
Leucovorin costs $1.25, and isn't it absolutely awful that the 
provider might be charging $42 to use that injection? How could 
he possibly charge so much money when it only costs $1.25? 
Well, how about extending that slide all the way out over to 
here and show the real cost rather than to imply that one of 
our oncologists is just trying to rip you off. That is all it 
is. The poor government is getting beaten up by the medical 
profession because they would dare charge $42 for a chemical 
that costs $1.25. Now, I don't know if $1.25 is the right cost 
or not, but I do absolutely know that slide is fraudulent. It 
is set up there to imply that somebody is ripping somebody off. 
Yet it ignores all the other costs that Dr. Ganske started to 
begin to talk about that is inherent in the price of giving 
that injection.
    Now, if our staff is going to present to us information, I 
would kindly recommend that they present to us factual 
information and let us get at the truth, not have a witch hunt.
    Now, Mr. Scully, you're here. We're going to talk to you 
about it. If there is fraud going on, get after it. If there 
are doctors absolutely cheating the system, get after them. But 
let us be honest about what we are discussing in a government 
program that year after year after year keeps trying to salvage 
the problem by paying people less than it costs to deliver 
services. Maybe we can't change that, but for pity sakes, let 
us be honest about that with the American people.
    I wasn't as brief as I intended, Mr. Chairman. I'm sorry. I 
yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman. We'll deduct 
that from his round of questioning.
    I'll simply indicate to the gentleman that we will 
recognize that many providers are underpaid. If we can recoup 
this billion dollars that is being wasted on underpayment for 
drugs, we'll probably have more than sufficient funds to pay a 
whole lot of providers.
    The Chair recognizes for an opening statement the gentleman 
from Wisconsin Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman. Thank you for 
chairing this important meeting.
    I agree with the previous speaker that we shouldn't be 
looking for a scapegoat, but I think at the same time we have a 
very serious responsibility to make sure that the taxpayers in 
this country are treated fairly, and according to the 
information that I have seen in fiscal year 2000, according to 
the Office of the Inspector General, Medicare could have saved 
between $887 million and $1.9 billion by paying prices that 
other government to nongovernment purchasers were paying. These 
amounts range from 17 to 32 percent to the total $5 billion 
Part B costs to the government, and the recipients paying the 
bills.
    So we do have an obligation, and we're not just talking 
about chump change here. This is a large amount of money, and 
it is our responsibility, I believe, to hold hearings like this 
to find out exactly what the problem is. So I, again, applaud 
you, Mr. Chairman, for holding the hearing.
    On another note, I know Mr. Scully will be testifying, and 
I just want to highlight an issue that I think that we also 
have to address, which is not 100 percent on point, but there 
is a Federal barrier right now which prevents safety net 
hospitals from negotiating better prices on in-patient 
pharmaceuticals. There is an unreasonably narrow interpretation 
by CMS of a Medicaid provision passed by Congress to facilitate 
free market negotiations between drug manufacturers and safety 
net providers. We need to make it possible for safety net 
providers to negotiate better prices on in-patient and out-
patient drugs, and I hope to explore that further, and I would 
yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for his opening statement the gentleman from 
Michigan Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman, and at the same time, 
I, too, will ask unanimous consent to put my entire statement 
into the record.
    I just would like to add, we do need reform in the system. 
It appears to be broken in lots of different ways. We need to 
help both the beneficiaries as well as the taxpayers. We need 
to make sure that the providers are adequately compensated in a 
fair way to make their expenses as well.
    We have a good task ahead of us. I welcome the hearing on 
the debate this morning, this afternoon, and yield back.
    [The prepared statement of Hon. Fred Upton follows:]
  Prepared Statement of Hon. Fred Upton, a Representative in Congress 
                       from the State of Michigan
    Mr. Chairman, thank you for calling today's hearing on Medicare's 
system for reimbursing prescription drugs administered in physicians' 
offices and certain other settings. As the title of the hearing 
indicates, the current system serves neither Medicare patients nor the 
taxpayers well.
    What our committee investigators and the GAO have uncovered is not 
pretty and reflects badly on everyone involved. Medicare's 
reimbursement system is being used as a tool in the intense competition 
for drug market share, leading drug manufacturers to overstate--
sometimes grossly overstate--the average wholesale prices for their 
drugs. The often substantial differences between what Medicare will pay 
for drugs and what the drugs actually cost physicians may be 
influencing prescribing practices. And Medicare patients--already 
grappling with the ravages of cancer or other terrible diseases are 
having their pockets picked--paying twenty percent of sometimes grossly 
inflated Medicare prices rather than the often much lower actual cost 
of the drug the doctors are using to treat them. Then they pay again 
when Medicare premiums rise in response to rising program costs. And 
the taxpayers, who foot 75 percent of the program's costs, are having 
their pockets picked as well.
    Mr. Chairman, I think all of us will agree today that we need to 
act quickly to fix the system in the interests of both Medicare 
beneficiaries and taxpayers.
    I hope that today's hearing will give us the information we need to 
do it right--and the impetus we need to do it quickly. We need to 
figure out a way to get real data on real acquisition costs so Medicare 
payments can be adjusted to reflect reality. At the same time, to 
ensure continued access to care in community-based settings, we need to 
fix portions of the physician fee schedule to ensure that the true 
costs of administering these drugs are reimbursed. In short, we need to 
give CMS the tools it needs, legislatively and administratively, to do 
its job right and to protect some of the sickest and most vulnerable of 
Medicare patients.

    Mr. Greenwood. The Chair thanks the gentleman and turns for 
an opening statement to the gentleman from Indiana Mr. Buyer.
    Mr. Buyer. Thank you for the hearing, and I ask unanimous 
consent that my statement be placed in the record, and I would 
also be hopeful--I'm most hopeful that we will not try to 
demonize those who are dedicated to saving life, whether it be 
our health care providers or the those of whom manufacture 
these great drugs that help extend life. I yield back my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for an opening statement the gentleman Mr. Bass from 
New Hampshire.
    Mr. Bass. Thank you, Mr. Chairman.
    It is clear this is not a simple problem. It will not 
demand a simple conclusion. I appreciate the two subcommittee 
chairmen holding this very important hearing, and I'll yield 
back.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for an opening statement the gentleman from Texas 
Mr. Barton.
    Mr. Barton. Thank you, Mr. Chairman, and Chairman, both of 
you, for holding this joint hearing. Let the record show they 
come to hearings other than energy hearings, that I'm on this 
subcommittee.
    I was visited yesterday in my office by a pharmaceutical 
chemotherapy company located in my district. They had done some 
mathematical analysis, financial analysis, not as extensive as 
what our subcommittees have done, and showed that just based on 
their review, there was almost a billion dollars that could be 
saved in the numbers that they looked at and the drugs that 
they were prescribing, that others were. So I'm going to have 
to be convinced that the current system is worth saving before 
I agree to save it.
    If I had to vote today, I would vote to say that physicians 
could not prescribe and treat cancer patients. They can choose 
one or the other, but they can't do both, because it seems to 
me that the system that we have today is broken. We can't fix 
it. So we need to change it. So I'm going to lock forward to 
the testimony, but put me down as a Doubting Thomas that the 
current system is worth saving. And with that I yield back the 
balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes for his opening statement the gentleman from 
Oklahoma Mr. Largent.
    Mr. Largent. Mr. Chairman, in the interest of time, I want 
to submit my full statement for the record, and I'll yield back 
my time.
    Mr. Greenwood. The Chair thanks the gentleman.
    Mr. Greenwood. The gentleman from North Carolina for an 
opening statement, Mr. Burr.
    Mr. Burr. Mr. Chairman, let me thank you for this hearing.
    Mr. Chairman, every time we look at health care, we find a 
more difficult animal than sometimes on the surface we think it 
is. I think what we're looking at today is, in fact, very 
complicated. I think the important thing for Members to 
remember is that over the years it has been, in fact, this body 
that legislates much of what we do in health care. We respond 
to providers, we respond to patients, and hopefully sometimes 
we respond to need, the needs that exist in the delivery 
systems that we have some jurisdiction on.
    We seldom get it exactly right. Most of the time we do get 
some things wrong, and, yes, in the last 7 years with the 
leadership changes, we have gotten some things wrong. But one 
thing that I have learned as a member of this committee as we 
talk about health care policy is that, one, we always have to 
strive to do a little bit better; and, two, we also have to be 
very cautious as we make change that we don't make things 
worse, that we look outside of the area that is our focus to 
make sure that changes that we make don't adversely affect 
other areas of the health care delivery system.
    I believe that we'll hear a lot of information today. I as 
one will take that information and try to put it through that 
test of how do we make it a little bit better. How do we make 
sure that we don't adversely affect other areas by not just the 
actions of this committee potentially in the future, but by 
some of the questions and some of the documents that, in fact, 
we put on the record, because I think, as we all know, 
throughout the health care system, whether you're in a hospital 
or whether you're in a provider's office today, your legal 
counsel watches what Congress says and what we do and 
eventually what we pass. And all of it to some degree is 
interpreted the same way when lawyers look at liability, and my 
hope is that Members will remember that as they ask questions, 
that they make sure that they clarify everything, and that in 
the end we do something that addresses exactly the problem that 
we're trying to get to, a faulty average wholesale price for 
pharmaceuticals in this country. If there are other areas we 
need to address, I note that this committee will have the will 
and the patience to do it.
    Mr. Chairman, thank you for your time, and I yield back.
    Mr. Greenwood. The Chair thanks the gentleman.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Robert L. Ehrlich, Jr., a Representative in 
                  Congress from the State of Maryland
    Mr. Chairman, thank you for holding this important hearing on 
legislative measures to address the Medicare reimbursement for 
pharmaceuticals. As you know, Medicare drug reimbursement levels affect 
millions of Americans who face a variety of serious illnesses.
    As we will hear today from the GAO testimony and others, our 
already-strapped Medicare program, which pays for a limited number of 
critical drug therapies, overpays for the costs of these drugs. For 
instance, the Committee notes that 24 highly used drugs may be 
resulting in a Medicare overpayment of at least $750 million annually. 
I am eager to hear the testimony before us today to learn more about 
this overpayment and consider ways to save the Medicare program--and 
Medicare beneficiaries who pay co-payments on these inflated values--a 
considerable amount of money.
    While it is crucial to address the overpayment calculation for 
these drugs, I also see the other side of the argument. As I learned 
during the August District Work Period, providers of care depend upon 
these overpayments to provide critical care to their patients. As we 
will also hear today, Oncology treatment facilities represent the front 
line of defense for nearly 80% of cancer patients in our country.
    Many in the cancer community acknowledge that the Medicare program 
employs a flawed reimbursement structure which overpays them for drugs. 
At the same time, however, they argue that Medicare also underpays for 
many services. For example, Medicare does not adequately support the 
critical role played by oncology nurses in the care of seniors and 
people with disabilities. In visiting an Oncology treatment facility in 
my district recently, I saw first-hand that preserving patient access 
to cancer care may only be achieved by simultaneously fixing Medicare's 
flawed reimbursement of cancer drugs and cancer services. Such serious 
flaws have forced these caregivers to engage in a form of ``cost 
shifting'' in which they use drug overpayments to offset Medicare's 
underpayment for the treatment services provided to beneficiaries. This 
is source of great uncertainty for seniors with cancer and places 
significant pressures on the professional caregivers who treat them. 
Given these two sides of the argument--with patients in the middle 
simply seeking quality care--I am eager to review the testimony of our 
witnesses and hope that we move forward to reform Medicare 
appropriately with the best interests of patients in mind. Mr. 
Chairman, I realize your deep concern about these issues as well and 
thank you for your leadership. I look forward to our witnesses' 
testimony and to working with you and our colleagues to ensure patient 
access to high quality care.
                                 ______
                                 
 Prepared Statement of Hon. Eliot Engel, a Representative in Congress 
                       from the State of New York
    Mr. Chairman, let me first express my profound sadness over the 
events of last week and extend my sincerest sympathy to the families of 
all the victims. But we must continue the business of the people. 
Today's hearing is focusing on how Medicare reimburses for drugs. It is 
apparent that it is a complex problem that affects many different 
areas, from patients, to physicians, to drug companies. Any proposed 
fix must consider the ramifications for all of these groups, however, 
the interests of Medicare recipients must be our top priority.
    Congress must consider any proposed fix carefully. There have been 
several attempts to address this issue, which have either failed to 
become law or failed when they became law and were repealed. The goal 
that we must keep in mind here is that seniors receive safe, effective, 
low-cost care. In order to achieve that end, providers must be 
adequately reimbursed for drugs and the services they provide but fraud 
and abuse must be rooted out. In the past, Congress has fallen back on 
AWP (average wholesale price) when providers have said that they were 
not being reimbursed for their costs. Instead of considering new 
reimbursement policies, AWP was used to cover these costs. Now, this 
money may be taken away and providers will be left with inadequate 
reimbursements for their services. Clearly we must be sure to consider 
these circumstances.
    There is no doubt that there is fraud and abuse because of AWP. I 
think we do need to fix this problem, but we need to make it better, 
not worse. I have introduced legislation to address one of the major 
problems with home infusion therapy. My bill, HR 2750, the Medicare 
Home Infusion Therapy Act, addresses the particular problems associated 
with home infusion therapy. Medicare's reimbursement policy for home 
infusion therapy is simply outdated. Modern medicine has made the 
administration of many drugs safe and effective in the home. However, 
because of ludicrous reimbursement provisions seniors are forced to 
stay in hospitals or trek to physicians offices on a daily basis to 
receive their treatment. In many cases, this treatment can be conducted 
in the home safely and at a fraction of the cost. To address this 
issue, HR 2750 directs the Secretary of Health and Human Services to 
set up a fee schedule for drug reimbursements and provider 
reimbursements that would ensure adequate and fair payments to 
providers. I feel that this legislation appropriately addresses the 
needs of seniors and providers and could serve as a model for a broader 
approach to the problems with AWP. I urge this Committee to examine 
this legislation closely and I also ask you, Mr. Scully, to work with 
me on this issue.
    I want to thank all of our witnesses for attending this hearing 
today under such difficult circumstances. I look forward to hearing 
your testimony.
                                 ______
                                 
  Prepared Statement of Hon. Gene Green, a Representative in Congress 
                        from the State of Texas
    Thank you Mr. Chairman for holding this hearing on Medicare's 
reimbursement system for oncology treatments.
    In light of last week's events, it is difficult to get too worked 
up about issues like Medicare reimbursements and practice expenses.
    But the truth is that we must continue to do our job in Washington, 
and as members of this committee, we must continue to improve our 
Medicare system for beneficiaries and providers.
    This issue is an important one. Each day, 3,400 Americans learn 
that they have cancer. Every minute, another American dies from some 
form of this disease.
    Cancer costs our country more than $107 billion each year.
    And with more than 60 percent of all cancers being diagnosed in 
individuals over age 55, the Medicare programs is bearing a significant 
burden for treating cancer patients.
    When the Medicare reimbursement system was first developed, most 
cancer patients went to the hospital to receive treatment.
    But nowadays, eighty-five percent of these cancer patients are 
receiving their treatment at out-patient cancer centers.
    Our reimbursement system does not reflect the changing world of 
cancer treatment.
    Medicare's reimbursement system for cancer drugs is based on an 
artificial average wholesale price or (AWP).
    As our witnesses will testify, however, this AWP is dramatically 
inflated for cancer drugs, causing the Medicare program and its 
beneficiaries to pay exorbitant costs for their life-saving cancer 
therapies.
    Medicare reimburses for 95% of the AWP for oncology drugs.
    But, because the AWP does not actually reflect the costs of 
oncology drugs, physicians are being reimbursed for considerably more 
than they are paying.
    As a result, physicians could be prescribing drugs based on how 
much they'll profit from them.
    There are allegations that physicians won't prescribe a newer, more 
effective drug, because they don't profit enough.
    Now oncologists, like most other Medicare providers, are underpaid 
for their practice expenses.
    As the GAO will testify, oncologists are underpaid by as much as 
15%. They use the windfall from the AWP to make up for the underpayment 
from practice expense.
    This system is bad for patients, is wasteful, and is poor public 
policy.
    There is no question on either side of this debate that the current 
system is broken.
    But we must be careful to repair it in a way that does not endanger 
cancer patients.
    We were all troubled by recent media reports where a pharmacist in 
Kansas was adulterating chemotherapy drugs, reducing their potency, and 
endangering the lives of cancer patients.
    We must ensure the integrity and quality of our cancer treatment 
system.
    But the reimbursement system we have in place must be changed.
    It encourages dishonest behavior by both the pharmaceutical 
manufacturers and the oncologists.
    It results in higher costs for both the program and the 
beneficiaries--patients who are probably facing the most daunting 
health crisis of their lives.
    But whatever solution we craft over the coming months, we must 
ensure that all Medicare beneficiaries have access to the life saving 
cancer therapies that they need.
    I look forward to the testimony of our witnesses, and I yield back 
the balance of my time.
                                 ______
                                 
Prepared Statement of Hon. Bobby L. Rush, a Representative in Congress 
                       from the State of Illinois
    Mr. Chairmen, I want to express my thanks to both of the Chairmen 
for holding this very important joint hearing on the reimbursement 
system for prescription drugs under the Medicare Part B program. While 
the Part B prescription drug program is a relatively small component of 
universe of prescription drugs used by seniors and others, it is, 
nonetheless, of critical importance to its users.
    The Part B program covers those drugs used with durable medical 
equipment (DME) or infusion devices, and the host of drugs administered 
in the treatment of cancer, hemophilia, organ transplantation, 
emphysema, asthma, kidney dialysis, AIDS, and pain management therapies 
which are administered on an out-patient basis or in home settings. 
Many Medicare beneficiaries rely on these life-giving medications and 
we must ensure their availability and affordability.
    Since the beginning of the Medicare Part B program for drug 
reimbursements, the cost of medications for beneficiaries under this 
program has grown significantly. Current estimates are that the cost of 
drug reimbursements has doubled in the last five years.
    I am particularly concerned about the special needs of some of the 
users of these drugs, and have a number of questions about the coverage 
provided. For example, in hemophiliacs, what is the difference in cost 
between home infusion and hospital treatment for a bleeding incident?
    I look forward to hearing the testimony of the distinguished panel 
of witnesses and to getting the answers to these, and many other 
questions regarding the reimbursement rates and processes under 
Medicare Part B program.
    Thank you.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Chairman Greenwood and Chairman Bilirakis, thank you for convening 
this hearing on Medicare's payment policy for prescription drugs. I 
realize that this hearing may not seem terribly important in light of 
the tragedy that struck our Nation on September 11th. The victims of 
these horrific attacks, their families, friends, and coworkers, and the 
security and safety of the American people are all at the forefront of 
our minds.
    Yet in a time when government resources may be needed for purposes 
none of us could have imagined two weeks ago, we have an added 
responsibility to ensure that more routine government expenditures are 
not wasteful. This hearing concerns improper and excessive payments on 
behalf of the Medicare program. As stewards of Medicare, the Committee 
cannot and should not allow this practice of overpayments for 
prescription drugs to continue.
    However, before we rush to fix the problem with legislation, we 
must ensure that any solution will do nothing to harm the patients who 
need these drugs. We must also be conscious of the impact any change we 
consider would have on the overall Medicare reimbursement system and 
other health care payers.
    Medicare pays for prescription drugs on an outpatient basis in 
limited circumstances. One of these circumstances occurs when drugs are 
administered by a physician, oftentimes during the treatment of cancer. 
Medicare's reimbursement formula is set at 95 percent of the drug's 
average wholesale price, or ``AWP.'' The problem with this formula is 
that AWP is an artificial number reported by the drug manufacturer. In 
fact, some drug manufacturers deliberately inflate the AWP that they 
report in order to make the drug more attractive to physicians. The 
results of this dubious behavior are higher copayments for seniors, an 
incentive for patients to receive wrong or unnecessary drugs, and waste 
to the Medicare program.
    Congress has been aware of the problem with the current formula for 
many years. Today, however, the stakes are higher, because any solution 
we create could have a far-reaching effect on the senior citizens of 
this country. This Committee will be considering a broad prescription 
drug benefit in Medicare. It is crucial that the Committee focus on 
developing a new reimbursement formula that is accurate and workable, 
based upon a benchmark price that cannot be manipulated.
    At today's hearing, some groups will testify that these outrageous 
overpayments for prescription drugs are necessary to make up for 
Medicare's under-payments for administering them. In correcting the 
drug reimbursement formula, the Committee should carefully examine this 
issue. We certainly do not want to create a situation where patients 
who need these drugs cannot find the drugs or a physician to administer 
them.
    However, the primary issue before us today is that of prescription 
drug pricing. Billions of dollars have already been wasted--dollars 
that could have been spent providing broader prescription drug coverage 
to seniors. We have a duty to make sure that this practice stops, and 
to concentrate on creating a Medicare drug benefit where seniors are 
protected from price-gouging incentives.

    Mr. Greenwood. The Chair now calls forward our first panel: 
Mr. William J. Scanlon, the Director of Health Care Issues for 
the General Accounting Office; the honorable George Grob, 
Deputy Inspector General, Department of Health and Human 
Services; and Mr. Zachary Bentley, the President of Ven-A-Care, 
Inc.
    Thank you, gentlemen, for your presence today. This is a 
joint hearing between the Energy and Commerce Subcommittee on 
Oversight and Investigations as well as the Subcommittee on 
Health. The Oversight and Investigation Subcommittee is an 
investigative subcommittee, and as such we've had the practice 
of taking testimony under oath. Do any of you object to 
testifying under oath?
    Seeing no such objection, the Chair then advises each of 
you that under the rules of the House and the rules of the 
committee, you are entitled to be advised by counsel. Do any of 
you desire to be advised by counsel during your testimony 
today?
    Seeing no such request, in that case, would you please rise 
and raise your right hand, and I will swear you in.
    [Witnesses sworn.]
    Mr. Greenwood. Thank you. You are now under oath, and we 
will recognize first Mr. Scanlon for his 5-minute opening 
statement. Welcome, sir.

TESTIMONY OF WILLIAM J. SCANLON, DIRECTOR, HEALTH CARE ISSUES, 
  GENERAL ACCOUNTING OFFICE; GEORGE F. GROB, DEPUTY INSPECTOR 
 GENERAL, DEPARTMENT OF HEALTH AND HUMAN SERVICES; AND ZACHARY 
            T. BENTLEY, PRESIDENT, VEN-A-CARE, INC.

    Thank you very much, Mr. Chairman, and members of the 
subcommittees. I'm pleased to be here today to discuss this 
important issue and wish to share with you some of the work 
that we've been doing on the payment by Medicare for 
prescription drug coverage--the prescription drugs that it 
covers. We are releasing today a study that was requested in 
the Beneficiary Improvements and Protection Act on Medicare's 
pricing of these drugs and will soon release a related study on 
payments for drug administration services under Medicare's 
physician fee schedule.
    Today I'd like to provide highlights of these two studies, 
both of which underscore the need for payment method 
modifications. Our drug pricing study's findings echo those of 
the Inspector General, the Justice Department, CMS and this 
committee's. All reveal that Medicare's method, as we've heard, 
for establishing drug payments is flawed. Simply put, tying 
Medicare's drug payment to AWP is a recipe for inflation and 
excess payments.
    Even though AWP is often labeled a retail or sticker price, 
it's not even that. A price is what a purchaser pays for a 
product. AWP is closer to just a number that manufacturers can 
specify without rules or criteria, a number not constrained by 
the need to have a purchaser willing to pay it.
    Like the Inspector General, we found that in 2001, 
wholesalers' catalog prices that would be available to any 
physician or pharmacy or supplier involved sizable discounts 
from the AWP. These conservative estimates of providers' 
acquisition costs indicated that discounts on physician-billed 
drugs, mostly chemotherapy drugs, ranged from 13 to 34 percent 
on most drugs and in some cases were even higher. Discounts on 
two inhalation therapy drugs that account for three-quarters of 
all the drugs billed to Medicare are startling: 78 percent for 
one and 85 percent off of AWP for the other.
    Medicare's troubling experience in terms of drug pricing is 
often contrasted with that of the Veterans Administration. As 
the VA is essentially a health care provider and not a third-
party payer like Medicare, its approach cannot simply be 
transferred to the Medicare program, but key elements can be 
emulated.
    The VA uses the leverage of its and other Federal 
purchasers' volume to secure prices that are similar to those 
of other volume purchasers' market prices that someone actually 
pays. To accomplish this, it uses its leverage to get 
verifiable data on actual market transactions to establish 
price schedules. Furthermore, for selected drugs, it has 
consolidated purchasing power even more and used competition to 
secure even lower prices.
    CMS is in a similar position in that it has available to it 
comparable information on market prices through the Medicare 
drug rebate program. We are recommending that CMS assess how it 
can use those data to ensure that Medicare's payments more 
closely reflect market prices and to explore how competitive 
procurements might be effectively used.
    Let me turn now to the issue of payments for drug 
administration. As has been indicated clearly, there is 
widespread agreement in terms of drug pricing. Our findings are 
not controversial. However, providers have indicated that 
underpayment in terms of drug administration needs to be made 
up for by overpayments in the drug purchase area.
    Our second report looks at payments for drug administration 
under the physician fee schedule, which include the bulk of 
chemotherapy administration services provided by oncologists.
    In the past, we have examined the then-named HCFA's 
development of the resource-based practice expense component of 
physicians' fees. That is the part of physician fees meant to 
reflect the cost of operating a practice, like nursing and 
administrative staff, equipment, rent and utilities. We 
concluded then that the Agency's basic method of computing 
these fees was sound. It achieves the goal laid out by the 
Congress; that is, to stop having the money Medicare pays 
physicians distributed according to what physicians 
historically charge for their services, and to have that money 
distributed according to the relative amounts of resources 
needed to provide each service.
    The implementation of the revised fee schedule, though, has 
been controversial. Since Medicare payments in the aggregate 
were deemed adequate, the Congress required that the new fees 
be budget-neutral. Then if one specialty's fees increased on 
average, some others would have to decline. Such 
redistributions have occurred, and some are quite significant. 
Oncology is one of the specialties that gain under the new fee 
schedule. Its practice expense payments are 8 percent higher 
than they would have been if the prior method of setting fees 
stayed in place. However, that does not mean that we do not 
believe there is a problem in the way fees for services, like 
chemotherapy administration by nurses, are calculated.
    HCFA modified its basic method in computing payments for 
services delivered without direct physician involvement, which 
include chemotherapy administration as well as some services 
provided by other specialties. The modifications were intended 
to correct for perceived low payments for these services, and 
while they did increase payments for some, they lowered them 
for many others. Moreover, the modifications increased payments 
on average for services that did involve physicians directly. 
Oncology payments were more affected by these modifications, 
because their services not involving direct physician 
participation constitute a bigger share of their billings than 
other services. These services for oncologists are about one-
third of their billings compared to 5 percent for all 
physicians.
    The payments for nonphysician chemotherapy administration 
are on average 15 percent lower than if HCFA used this basic 
method. On the other hand, practice expense payments for 
services provided by oncologists themselves are 1 percent 
higher because of these changes. Using the basic method, which 
we believe is correct, for all services would increase practice 
expense payments to oncologists by 6 percent.
    We don't think that the HCFA's adjustments, as I've 
indicated, were appropriate, and our study will recommend that 
they use the basic methodology--that CMS use the basic 
methodology to determine practice expense payments for all 
services.
    Oncologists have raised other concerns about the physician 
fee schedule, including the representativeness of data used to 
estimate these practice expenses and whether the data reflects 
current practices in delivering services.
    We are currently conducting another study to determine how 
CMS can improve and update the information used to estimate 
practice expenses; however, what impact improved data may have 
on payments is uncertain. Payments are based on the differences 
in expenses of one specialty compared to another. Some of the 
data concerns raised by oncologists may apply equally well to 
other specialties so that additional and many current data may 
reveal that the relative cost of different specialty services 
would only change modestly.
    Overall, let me say in conclusion, we believe that it 
should be a principle of Medicare payment policy to pay for 
each service appropriately and not to rely on overpayments for 
some to offset inadequate payments for others. An efficiently 
operated Medicare program needs payments that reflect market 
prices so that it benefits from the discipline imposed by other 
payers. It also needs to judiciously use the buying power 
associated with its size to secure even greater efficiencies, 
though that must be balanced with its responsibilities to 
assure access for beneficiaries and to treat providers fairly.
    Thank you very much, Mr. Chairman. I'll answer any 
questions you have.
    [The prepared statement of William J. Scanlon follows:]
Prepared Statement of William J. Scanlon, Director, Health Care Issues, 
                United States General Accounting Office
    Messrs. Chairmen and Members of the Subcommittees: I am pleased to 
be here as you discuss the pricing of Medicare's part B-covered 
prescription drugs. The pricing of these drugs--largely drugs that 
cannot be administered by patients themselves--has been under scrutiny 
for several years. Most of the part B drugs with the highest Medicare 
payments and billing volume fall into three categories: those that are 
billed for by physicians and typically provided in a physician office 
setting (such as chemotherapy drugs),1 those that are billed 
for by pharmacy suppliers and administered through a durable medical 
equipment (DME) item (such as a respiratory drug given in conjunction 
with a nebulizer 2), and those that are also billed by 
pharmacy suppliers but are patient-administered and covered explicitly 
by statute.3 Studies by the Department of Justice, the 
Department of Health and Human Services' (HHS) Office of the Inspector 
General (OIG), and the House Committee on Commerce show that Medicare's 
payment for these drugs in some cases is significantly higher than the 
actual costs to the physicians and other providers who bill Medicare 
for these products.
---------------------------------------------------------------------------
    \1\ In the case of chemotherapy drugs, the common practice is for a 
nurse to provide the services to administer the drug and for the 
physician to bill Medicare accordingly.
    \2\ A nebulizer is a device driven by a compressed air machine. It 
allows the patient to take medicine in the form of a mist (wet 
aerosol).
    \3\ Medicare-covered drugs and biologicals that can be self-
administered include such drugs as blood clotting factors and some oral 
drugs used in association with cancer treatment and immunosuppressive 
therapy.
---------------------------------------------------------------------------
    In September 2000, the Health Care Financing Administration 
(HCFA)--now the Centers for Medicare and Medicaid Services (CMS) 
4--took steps to reduce Medicare's payment for part B-
covered drugs by authorizing Medicare carriers, the contractors that 
pay part B claims, to use prices obtained in the Justice Department 
investigations of providers' drug acquisition costs. HCFA retracted 
this authority in November 2000 following concerns raised by providers. 
In December 2000, as part of recent Medicare legislation,5 
the Congress asked us to study Medicare's payments for part B-covered 
drugs and make recommendations for pricing methodology refinements. We 
have reported our findings and made recommendations, as mandated, 
today. 6
---------------------------------------------------------------------------
    \4\ Our statement refers to HCFA when discussing actions it took 
under that name.
    \5\ The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (P.L. 106-554, Appendix F).
    \6\ Medicare: Payments for Covered Outpatient Drugs Exceed 
Providers' Costs (GAO-01-1118, Sept. 21, 2001.)
---------------------------------------------------------------------------
    My remarks today will focus on (1) Medicare payment policies to 
cover part B-covered drug costs and costs of administering the drugs 
and (2) key features of other payers' reimbursement policies that 
suggest opportunities to improve the appropriateness of Medicare's 
payments. My comments are based primarily on our study of Medicare 
payments for part B-covered drugs and a forthcoming study of 
physicians' practice expense payments under Medicare's fee schedule.
    In summary, our study shows that Medicare's method for establishing 
drug payments is flawed. Medicare pays 95 percent of the average 
wholesale price (AWP), which, despite its name, may be neither an 
average nor what wholesalers charge. It is a price that manufacturers 
derive using their own criteria; there are no requirements or 
conventions that AWP reflect the price of any actual sale of drugs by a 
manufacturer. Manufacturers report AWPs to organizations that publish 
them in drug price compendia, and Medicare carriers that pay claims for 
part B drugs base providers' payments on the published AWPs.
    We found that, in 2001, widely available prices at which providers 
could purchase drugs were substantially below AWP, on which Medicare 
payments are based. For both physician-billed drugs and pharmacy 
supplier-billed drugs, Medicare payments often far exceeded widely 
available prices. Despite concerns about what discounts may be 
available to smaller-volume purchasers, physicians who billed Medicare 
for low volumes of drugs reported receiving discounts from AWP, for 
most drugs, that were similar to or greater than those afforded by the 
widely available prices we documented.
    Physicians and pharmacy suppliers contend that the excess payments 
for covered drugs are necessary to offset what they claim to be 
inappropriately low or no Medicare payments for services related to the 
administration or delivery of these drugs. For administering physician-
billed drugs, Medicare makes explicit payments under the physician fee 
schedule. Our forthcoming review of practice expense payments under the 
fee schedule will make several points regarding oncologists' payments. 
It will show that Medicare's payments to these specialists were 8 
percent higher than they would have been if the program's prior payment 
method had remained in place and will show that oncologists' payments 
relative to their estimated practice expenses were close to the average 
for all specialists. However, we will also show that HCFA made 
questionable modifications to its basic method of setting practice 
expense payments, which resulted in lowering the average fees paid for 
the administration of drugs by physicians' staffs.
    For delivering pharmacy supplier-billed drugs, Medicare's payment 
policies are uneven. Pharmacy suppliers billing Medicare receive a 
dispensing fee for one drug type--inhalation therapy drugs--but there 
are no similar payments for other DME-administered or oral drugs. 
However, Medicare pays DME suppliers for the rental or purchase of 
equipment and supplies, and long-standing problems in the program's 
payments for these items may result in overpayments that implicitly 
compensate for some service delivery costs not covered.
    Other payers and purchasers, such as health plans and the 
Department of Veterans Affairs (VA), employ different approaches in 
paying for or purchasing drugs that may be instructive for Medicare. In 
general, they make use of the leverage from their volume and 
competition to secure better prices. The federal purchasers, 
furthermore, use that leverage to secure verifiable data on actual 
market transactions to establish their price schedules. Private payers' 
practices--such as negotiating prices that result in selecting certain 
products or suppliers and arriving at terms without open competition--
would not be easily adaptable to Medicare, given the program's size and 
need to ensure access for providers and beneficiaries. How other 
federal agencies have exercised their leverage may offer more 
applicable lessons.
                               background
    The traditional Medicare program does not have a comprehensive 
outpatient prescription drug benefit, but under part B (which covers 
physician and other outpatient services), it covers roughly 450 
pharmaceutical products and biologicals. 7 In 1999, spending 
for Medicare part B-covered prescription drugs totaled almost $4 
billion. 8
---------------------------------------------------------------------------
    \7\ For the remainder of this statement, we will refer to ``drugs 
and biologicals'' as ``drugs.''
    \8\ Spending is defined as Medicare's total payment, of which 
Medicare's share is 80 percent and the beneficiaries' share is 20 
percent.
---------------------------------------------------------------------------
Small Number of Products Accounts for Largest Shares of Program 
        Spending and Claims Volume
    A small number of products accounts for the majority of Medicare 
spending and billing volume for part B drugs. In 1999, 35 drugs 
accounted for 82 percent of Medicare spending and 95 percent of the 
claims volume for these products. 9 The 35 products 
included, among others, injectible drugs to treat cancer, inhalation 
therapy drugs, and oral immunosuppressive drugs (such as those used to 
treat organ transplant patients).
---------------------------------------------------------------------------
    \9\ Our analysis excluded some high-volume and high-expenditure 
drugs because of inadequate pricing data. Volume for a drug is measured 
in terms of the number of units provided. Analyses exclude data on 
services supplied in Puerto Rico and the U.S. Virgin Islands and 
exclude payments made on behalf of Railroad Retirement Board 
beneficiaries.
---------------------------------------------------------------------------
    The physician-billed drugs accounted for the largest share of 
program spending, while pharmacy supplier-billed drugs constituted the 
largest share of the billing volume. Three specialties--hematology 
oncology, medical oncology, and urology--submitted claims for 80 
percent of total physician billings for part B drugs. Two inhalation 
therapy drugs accounted for 88 percent of the Medicare billing volume 
for pharmacy-supplied drugs administered in a patient's residence. 
10
---------------------------------------------------------------------------
    \10\ These two drugs are ipratropium bromide and albuterol (unit 
dose form).
---------------------------------------------------------------------------
Medicare Payments for Drugs Are Based on Published AWPs
    Medicare's payment for part B-covered drugs is based on the 
product's AWP, which is a price assigned by the product's manufacturer 
and may be neither ``average'' nor ``wholesale.'' Instead, the AWP is 
often described as a ``list price,'' ``sticker price,'' or ``suggested 
retail price.''
    The term AWP is not defined in law or regulation, so the 
manufacturer is free to set an AWP at any level, regardless of the 
actual price paid by purchasers. Manufacturers periodically report AWPs 
to publishers of drug pricing data, such as the Medical Economics 
Company, Inc., which publishes the Red Book, and First Data Bank, which 
compiles the National Drug Data File. In paying claims, Medicare 
carriers use published AWPs to determine Medicare's payment amount, 
which is 95 percent of AWP. 11 Thus, given the latitude 
manufacturers have in setting AWP, these payments may be unrelated to 
market prices that physicians and suppliers actually pay for the 
products.
---------------------------------------------------------------------------
    \11\ Technically, the payment equals 95 percent of AWP for the 
drugs grouped under each HCFA Common Procedure Coding System (HCPCS) 
code. Individual drugs are identified by the National Drug Code (NDC). 
NDCs are assigned by the Food and Drug Administration and are the 
universal product identifiers for drugs for human use. Each NDC 
specifies a chemical entity, manufacturer, dosage form, strength, and 
package size. For example, a single drug--marketed by one manufacturer 
in one form and strength but in three package sizes--would have three 
NDCs. Because one HCPCS code may have multiple NDCs, the carriers 
determine the Medicare payment by analyzing multiple NDCs' AWPs. For 
multisource drugs, the payment allowance is 95 percent of the lower of 
(1) the median AWP of all generic forms of the drug or (2) the lowest 
brand name product's AWP.
---------------------------------------------------------------------------
Drug Supply Chain Involves Multiple Parties and Arrangements That 
        Influence the Net Price to the End Purchaser
    The actual price that providers pay for Medicare part B drugs is 
often not transparent. Physicians and suppliers may belong to group 
purchasing organizations (GPO) that pool the purchasing of multiple 
entities to negotiate prices with wholesalers or manufacturers. GPOs 
may negotiate different prices for different purchasers, such as 
physicians, suppliers, or hospitals. In addition, providers can 
purchase part B-covered drugs from general or specialty pharmaceutical 
wholesalers or can have direct purchase agreements with manufacturers.
    Certain practices involving these various entities can result in 
prices paid at the time of sale that do not reflect the final net cost 
to the purchaser. Manufacturers or wholesalers may offer purchasers 
rebates based on the volume of products purchased not in a single sale 
but over a period of time. Manufacturers may also establish 
``chargeback'' arrangements for end purchasers, which result in 
wholesalers' prices overstating what those purchasers pay. Under these 
arrangements, the purchaser negotiates a price with the manufacturer 
that is lower than the price the wholesaler charges for the product. 
The wholesaler provides the product to the purchaser for the lower 
negotiated price, and the manufacturer then pays the wholesaler the 
difference between the wholesale price and the negotiated price.
  medicare's payment for part b-covered drugs is significantly higher 
               than prices widely available to providers
    For the part B-covered drugs accounting for the bulk of Medicare 
spending and claims, Medicare payments in 2001 were almost always 
considerably higher than wholesalers' prices that were widely available 
to physicians and suppliers. This was true regardless of whether the 
drugs had competing products or were available from a single 
manufacturer. Physicians who billed Medicare for relatively small 
quantities of these drugs also obtained similar prices.
Wide Disparities Exist Between Drug Acquisition Costs and Medicare 
        Payments
    Our study shows that there can be wide disparities between a drug's 
estimated acquisition cost and Medicare's payment for that drug. 
Physician-billed drugs account for the bulk of Medicare spending on 
part B drugs. Of those billed by physicians, drugs used to treat cancer 
accounted for most of Medicare's expenditures. Specifically:

 Widely available discounts for 17 of the physician-billed 
        drugs we examined averaged between 13 percent and 34 percent 
        less than AWP.
 For two other physician-billed drugs, Dolasetron mesylate and 
        Leucovorin calcium, average discounts were considerably 
        larger--65 percent and 86 percent less than AWP.
    The discounts on physician-billed drugs, based on wholesaler and 
GPO catalogue prices, are notably lower than Medicare's payment, which 
reflects a discount of 5 percent below AWP. The discounts indicate that 
Medicare's payments for these drugs were at least $532 million higher 
than providers' acquisition costs in 2000. Further, the discounts we 
report may only be the starting point for additional discounts provided 
to certain purchasers, as chargebacks, rebates, and other discounts may 
drive down the final sale price.
    Concerns have been expressed that small providers either could not 
or do not obtain such favorable prices. Therefore, we surveyed a sample 
of physicians who billed Medicare for low volumes of chemotherapy drugs 
to see if they were able to obtain similar discounts. 12 All 
of the low-volume purchasers who responded to our survey reported 
obtaining similar or better discounts than the widely available prices 
we had documented. More than one-third of these physicians reported 
belonging to GPOs and obtained the GPOs' substantial discounts, while 
others said they had contracts with manufacturers and wholesalers.
---------------------------------------------------------------------------
    \12\ We conducted a telephone survey of a sample of physicians who 
billed Medicare for a low-volume of cancer treatment drugs in 1999. For 
more detail, see GAO-01-1118.
---------------------------------------------------------------------------
    As with physician-billed drugs, Medicare's payments for pharmacy 
supplier-billed drugs generally far exceeded the prices available to 
these suppliers. For the drugs we examined, Medicare's payments were at 
least $483 million more than what the suppliers paid in 2000. Further, 
the discounts we report were largest for products that could be 
obtained from more than one source. Inhalation therapy drugs 
administered through DME and oral immunosuppressive drugs represent 
most of the high-expenditure, high-volume drugs billed to Medicare by 
suppliers. Specifically:

 Two drugs, albuterol and ipratropium bromide, used with DME 
        for respiratory conditions, account for most of the pharmacy-
        supplied drugs paid for by Medicare. In 2001, they were 
        available to pharmacy suppliers at prices that averaged, 
        respectively, 85 percent and 78 percent less than AWP.
 Other high-volume DME-administered drugs had prices averaging 
        69 percent and 72 percent less than AWP. These findings are 
        consistent with prior studies of the prices of similar drugs. 
        13
---------------------------------------------------------------------------
    \13\ Medicare Reimbursement of Albuterol (HHS OIG, OEI-03-00-00311, 
June 2000) and Medicare Reimbursement of Prescription Drugs (HHS OIG, 
OEI-03-00-00310, Jan. 2001).
---------------------------------------------------------------------------
 Two of the four high-volume oral immunosuppressives were 
        available from wholesalers with average discounts of 14 percent 
        and 77 percent. Wholesale price information on the other two 
        was not available, but retail prices from online pharmacies 
        were as much as 13 percent and 8 percent below AWP.
Policies to Pay for Related Delivery and Administration Services Vary 
        by Provider
    Medicare payment policies for administering or delivering a drug 
vary, depending on who provides the drug to the patient. Physicians are 
compensated directly for drug administration through the physician fee 
schedule. Pharmacy suppliers are compensated for dispensing inhalation 
therapy drugs used with a nebulizer, which make up the majority of 
their part B drug claims. No explicit payments are made to pharmacy 
suppliers for dispensing other drugs, but they may receive payments for 
equipment and supplies associated with DME-administered drugs. Both 
physicians and pharmacy suppliers contend that the excess in Medicare's 
payments for part B-covered drugs compensates for related service costs 
inadequately reimbursed or not explicitly covered at all.
    In prior work on the Medicare physician fee schedule, we concluded 
that the agency's basic method of computing practice expense payments 
to physicians was sound. 14 The implementation of this fee 
schedule, however, has been controversial. The Congress required that 
payments be budget neutral relative to prior spending. Medicare's 
physician payments were, in the aggregate, seemingly adequate, as most 
physicians were participating in Medicare and accepting the program's 
fees as payment in full. Because of the budget neutrality requirement, 
if one specialty's fees increased on average, some others would have to 
decline. Such redistributions have occurred and some are significant.
---------------------------------------------------------------------------
    \14\ Practice expenses constitute one of three components in 
Medicare's physician fee schedule. The other two are work and 
malpractice expenses. For the physician's average fee in 1999, practice 
expenses accounted for about 42 percent; work, about 55 percent; and 
malpractice, about 3 percent.
---------------------------------------------------------------------------
    Oncologists, who represent the majority of physicians billing for 
drugs, argue that Medicare's payments for administering chemotherapy 
are inappropriately low and that the excess Medicare drug payments are 
needed to offset their losses. Yet oncology is one of the specialties 
to gain under the resource-based physician fee schedule. In our 
separate study on physicians' practice expenses under Medicare's fee 
schedule, we will show that payments to oncologists were 8 percent 
higher than they would have been if the prior charge-based payment 
method had been maintained; the study will also show that oncologists' 
payments relative to their estimated practice expenses, which include 
chemotherapy administration, were close to the average for all 
specialties.
    While oncologists do not appear disadvantaged overall under the fee 
schedule, adjustments HCFA made to the basic method of computing 
payments reduced fees for some oncologists' services. In those 
adjustments, HCFA modified the basic method in computing payments for 
services delivered without direct physician involvement, like much of 
chemotherapy administration. The modifications were intended to correct 
for perceived low payments for these services. While they increased 
payments for some of these services, they lowered them for many others. 
Moreover, they increased payments on average for services involving 
physicians. Oncology payments were particularly affected, as services 
without physician involvement constitute about one-third of 
oncologists' Medicare-billed services, compared to about 5 percent of 
all physician-billed services. Because of the modifications to the 
basic method, oncology practice expense payments for nonphysician 
chemotherapy administration were on average 15 percent lower, while 
payments for physician-administered services were 1 percent higher, 
than if HCFA had used the basic method. Across all services, the 
modifications resulted in oncology practice expense payments that were 
6 percent lower. 15 Using the basic method for all services 
would eliminate these reductions and add about $31 million to oncology 
payments. Our study will recommend that CMS revert to the use of the 
basic methodology to determine practice expense payments for all 
services.
---------------------------------------------------------------------------
    \15\ The source for these figures is our analysis of 2001 practice 
expense fees, based on 1999 Medicare utilization.
---------------------------------------------------------------------------
    We will also recommend that CMS address a data adjustment it made 
that affects oncology payments under the new fee schedule. The agency 
reduced oncology's reported supply expenses to keep from paying twice 
for drugs that are reimbursed separately by Medicare. Oncologists 
acknowledge that the supply expense estimate needed to be reduced, but 
argue that the reduction was too large. We have recommended that the 
agency develop the appropriate data to more accurately estimate 
oncology supply expenses. Substituting a supply expense estimate based 
on a methodology developed by the American Society of Clinical Oncology 
would raise practice expense payments an additional $20 
million,16 if done in conjunction with our recommendation to 
use the basic method to calculate payments for all services.
---------------------------------------------------------------------------
    \16\ The source for these figures is our analysis of 2001 practice 
expense fees, based on 1999 Medicare utilization.
---------------------------------------------------------------------------
    Oncologists have raised concerns about whether the data used to 
estimate their practice expenses constituted a representative sample of 
practices surveyed and whether these data reflect current practices in 
delivering services. How improvements in the data to estimate practice 
expenses may affect payment levels is uncertain. Payments are based on 
the differences in expenses of services of one specialty compared to 
those of others. Some of the data concerns raised by oncologists may 
apply to other specialties as well, so that additional and more current 
data may reveal that the relative cost of one service compared to 
others may have changed only modestly. We are conducting a separate 
study to determine how CMS can improve and update the information used 
to estimate specialties' practice expenses.
    Similar to the physicians who bill for part B drugs, pharmacy 
suppliers and their representatives contend that the margin on the 
Medicare drug payment is needed to compensate them for costs not 
covered by Medicare--that is, the clinical, administrative, and other 
labor costs associated with delivering the drug. These include costs 
for billing and collection; facility and employee accreditation; 
licensing and certifications; and providing printed patient education 
materials. Medicare pays a dispensing fee of $5.00 for inhalation 
therapy drugs used with a nebulizer, which are the vast majority of the 
pharmacy-supplied drugs. This fee was instituted in 1994. It is higher 
than dispensing fees paid by pharmacy benefit managers, which average 
around $2.00, and is comparable to many state Medicaid programs, which 
range from $2.00 to over $6.00. For other pharmacy-supplied drugs, 
Medicare makes no explicit payment for dispensing the drug.
    Besides the profits on the DME-related drugs, pharmacy suppliers 
may receive additional compensation through the payment for DME and 
related supplies. Our prior work suggests that, for two reasons, 
Medicare DME and supply payments may exceed market prices. 
17 First, because of an imprecise coding system, Medicare 
carriers cannot determine from the DME claims they process which 
specific products the program is paying for. Medicare pays one fee for 
all products classified under a single billing code, regardless of 
whether their market prices are greatly below or above that fee. 
18 Second, DME fees are often out of line with current 
market prices. Until recently, DME fees had generally been adjusted 
only for inflation because the process required to change the fees was 
lengthy and cumbersome. As a result, payment levels may not reflect 
changes in technology and other factors that could significantly change 
market prices.
---------------------------------------------------------------------------
    \17\ See Medicare: Need to Overhaul Costly Payment System for 
Medical Equipment and Supplies (GAO/HEHS-98-102, May 12, 1998).
    \18\ The equipment and supply payment is determined from a DME fee 
schedule, whose rates are based on a state-specific fee schedule and 
subject to national minimum and maximum payment limits. Fees are based 
on average historical supplier charges that are adjusted for inflation 
over time.
---------------------------------------------------------------------------
 other purchasers' practices are instructive for reforming medicare's 
               method of paying for part b-covered drugs
    Private insurers and federal agencies, such as VA, employ different 
approaches in paying for or purchasing drugs that may provide useful 
lessons for Medicare. In general, these payers make use of the leverage 
of their volume and competition to secure better prices. The federal 
purchasers, furthermore, use that leverage to secure verifiable data on 
actual market transactions to establish their price schedules. Private 
payers can negotiate with some suppliers to the exclusion of others and 
arrive at terms without clear criteria or a transparent process. This 
practice would not be easily adaptable to Medicare, given the program's 
size and need to ensure access for providers and beneficiaries. How 
other federal agencies have exercised their leverage may be more 
instructive and readily adaptable for Medicare.
    VA and certain other government purchasers buy drugs based on 
actual prices paid by private purchasers--specifically, on the prices 
that drug manufacturers charge their ``most-favored'' private 
customers. 19 In exchange for being able to sell their drugs 
to state Medicaid programs, manufacturers agree to offer VA and other 
government purchasers drugs at favorable prices, known as Federal 
Supply Schedule (FSS) prices. So that VA can determine the most-favored 
customer price, manufacturers provide information on price discounts 
and rebates offered to domestic customers and the terms and conditions 
involved, such as length of contract periods and ordering and delivery 
practices. 20 (Manufacturers must also be willing to supply 
similar information to CMS to support the data on the average 
manufacturer's price, known as AMP, and best price they report for 
computing any rebates required by the Medicaid program.)
---------------------------------------------------------------------------
    \19\ Under federal procurement regulations, the government seeks to 
obtain the price is intended to equal or better the price that the 
manufacturer offers its most-favored nonfederal customer under 
comparable terms and conditions.
    \20\ Because the terms and conditions of commercial sales vary, 
there may be legitimate reasons why the government does not always 
obtain the most-favored customer price. Hence, under the regulations, 
VA may accept a higher price if it determines that (1) the price 
offered to the government is fair and reasonable and (2) awarding the 
contract is otherwise in the best interest of the government.
---------------------------------------------------------------------------
    VA has been successful in using competitive bidding to obtain even 
more favorable prices for certain drugs. Through these competitive 
bids, VA has obtained national contracts for selected drugs at prices 
that are even lower than FSS prices. These contracts seek to 
concentrate the agency's purchase on one drug within therapeutically 
equivalent categories for the agency's national formulary. In 2000, VA 
contract prices averaged 33 percent lower than corresponding FSS 
prices.
    Medicare's use of competition has been restricted to several 
limited-scale demonstration projects authorized by the Balanced Budget 
Act of 1997. In one of these demonstrations under way in San Antonio, 
Texas, suppliers bid to provide nebulizer drugs, such as albuterol, to 
Medicare beneficiaries. While Medicare normally allows any qualified 
provider to participate in the program, under the demonstration only 11 
bidders for nebulizer drugs were selected to participate. In exchange 
for restricting their choice of providers to the 11 selected, 
beneficiaries are not liable for any differences between what suppliers 
charge and what Medicare allows. Preliminary CMS information on the San 
Antonio competitive bidding demonstration suggests no reported problems 
with access and a savings of about 26 percent realized for the 
inhalation drugs.
                        concluding observations
    Our study on Medicare payments for part B drugs shows that Medicare 
pays providers much more for these drugs than necessary, given what the 
providers likely paid to purchase these drugs from manufacturers, 
wholesalers, or other suppliers. Unlike the market-based fees paid by 
VA and other federal agencies, Medicare's fees are based on AWP, which 
is a manufacturer-reported price that is not based on actual 
transactions between seller and purchaser. Physicians contend that the 
profits they receive from Medicare's payments for part B drugs are 
needed to compensate for inappropriately low Medicare fees for most 
drug administration services. Similarly, the case argued by some 
pharmacy suppliers for Medicare's high drug payments is that not all of 
their costs of providing the drugs are covered.
    In our view, it should be a principle of Medicare payment policy to 
pay for each service appropriately and not to rely on overpayments for 
some services to offset inadequate payments for complementary services. 
If Medicare were to follow this principle and lessons from other payers 
in setting fees for part B drugs, it would use information on actual 
market prices net of rebates and discounts--similar to information 
currently available to VA and CMS--to establish Medicare payments. It 
could also determine market-based fees, where appropriate, through a 
competitive bidding process. Medicare would pay for administration and 
delivery of these drugs separately, as it does currently for drugs 
supplied by physicians and for inhalation therapy drugs. As the way 
drugs are supplied and administered varies, different methods of 
determining payments would be necessary. Paying for these services 
explicitly would enable Medicare to eliminate implicit payments that 
may have been made through excessive payments for DME and the drugs 
associated with the DME payment. In our report, we make recommendations 
reflecting these lessons to revise the program's payment methods.
    Messrs. Chairmen, this concludes my statement. I would be happy to 
answer any questions that you or Subcommittee Members may have.
                      contact and acknowledgments
    For more information regarding this testimony, please contact me at 
(202) 512-7114 or Laura Dummit at (202) 512-7119. Other contributors to 
this statement include Carol Carter, Iola D'Souza, Hannah Fein, Kathryn 
Linehan, and James Mathews.

    Mr. Greenwood. Thank you, Mr. Scanlon, for your testimony.
    And I recognize Mr. Grob, the Deputy Inspector General for 
Health and Human Services, for your testimony, sir.

                  TESTIMONY OF GEORGE F. GROB

    Mr. Grob. Thank you, Mr. Chairman, for the opportunity to 
testify here today. Everyone said Medicare pays too much, and 
listening to all the opening statements, I'm not sure that I 
have a whole lot to add to the knowledge that has already been 
presented.
    Mr. Greenwood. I'm sure you have more credibility than we 
do.
    Mr. Grob. What I'll try to do, perhaps, is to add some 
additional pieces of information that may help. First of all, 
with regard to the amount that we pay too much, the number that 
is being bandied around is about a billion dollars, and I think 
that is a fair bottom line. Here is the reason. Our studies 
have shown, using the catalogs available that we've been able 
to find for 24 drugs, which represent about $3.7 out of the $5 
billion in the year 2000 that Medicare authorized for the 
payment of these drugs, that we saw a loss of about $880 some-
odd million. Of course, if we had looked at all the drugs, that 
would have been higher and perhaps pressing a billion dollars. 
So that is a fair benchmark for people to have in their minds.
    But we have to remember that these are catalog prices. 
These are the numbers that are sort of out there. So when the 
drugs are actually paid for, it is very likely that the prices 
are even lower than that. We ourselves did not obtain those 
lower prices. Ours are the more conservative, just catalog 
price.
    Now, we've also looked at the Federal Supply Schedule which 
is negotiated by the Veterans Administration, and there, of 
course, we found a $1.9 billion difference in the spread. Now, 
many people would say that that's unfair because of the special 
position that the Veterans Administration is in; that you 
really can't say, well, Medicare ought to be able to get drugs 
at those prices. That may be true, but here are some things to 
think about.
    First of all, we assume that the drug companies are making 
a profit on those drugs, so that that represents a price that 
they are willing to offer to at least some large buyers. And 
we're not at all certain, since we ourselves did not look at 
the actual invoices, of what the spreads are that physicians 
and others--large suppliers--are actually obtaining on their 
drugs. Perhaps it's an outer limit, but I think it's fair to 
say that the actual loss to Medicare is probably in the 
vicinity of $1 to $2 billion, as best we can tell.
    Another point that I would make is that we have reviewed 
these drug prices intensely, starting in the mid-1980's 
because, of the effects to Medicaid program as well, but we 
have been looking particularly hard since 1997. And over the 
last 4 years, we have never found it to be any way other than 
what has been described at this hearing. Every study that we do 
finds these same results. But near the end of my testimony, I'm 
going to reflect that the gap is widening, and the loss is 
increasing.
    We've talked about the system being flawed, and I think 
most people describe it well. And I do take to heart the 
admonition not to get to the motives of people. But I just 
would like to give two insights about this.
    If you were to sit down in an office with an individual, a 
representative of the drug company here and perhaps a physician 
here, and say, ``Listen, I will sell you the drug for $100, but 
I will tell Medicare that I sell it for $200, you will have 
$100, and I will have $100. It's not a bad deal.'' Someone then 
might comment that a kind of deal has been made, perhaps games 
are being played to achieve a higher market share by that drug 
company, presenting its drug in that way. But that would still 
be true, even if the meeting doesn't occur in the room. This is 
not too hard to understand. Simply posting of these numbers on 
a public list is enough to achieve the same effect. So we have 
to be wary of the effect even if in the studies that I have 
done we have not reached the motives of the individuals.
    There's also something here that I call ``upside-down 
economics.'' If I were to ask an undergraduate economic student 
the following question: ``Which company would likely achieve 
the greatest market share? Is it the one with the highest 
average wholesale price or the one with the lowest?'' And the 
student were to say: ``It's the one with the highest.'' The 
professors would say; ``That is incorrect. Obviously the 
company whose wholesale price is the lowest would be the one 
that would expect to sell more of their product.'' That is the 
answer the professor would have to give, of course, unless 
you're talking about Medicare's payment for prescription 
drugs--in which the whole theory simply reverses.
    The physician community has raised its concerns here, and 
we certainly take that to heart. We fully support a fair 
reimbursement under the Medicare program.
    Perhaps another insight will help here. What I believe is 
wrong with the current system is that it's behaving this way. 
If an individual felt that his mortgage payments were too high, 
he might want to go to the bank and say: ``Since you're 
charging me so much there, could you reduce my automobile 
payment?'' Well, that's not a good way to do banking, but it 
might not be an unreasonable question.
    The problem with the Medicare program is that in an 
analogous situation, the automobile dealer and the automobile 
purchaser are telling the bank how much they will pay for the 
car payment as opposed to the Medicare program, the Secretary, 
the Department and the Congress deciding what that amount is. 
And I believe that that's fundamentally what's wrong, even if 
we do have some compassionate concern for the dollars that the 
medical profession needs to carry out what it does.
    In any event, whatever system that we do use should not be 
based on a number that is misnamed, misleading, and make 
believe.
    There are a lot of options to handle this problem, and 
we've listed them extensively in the testimony that we've 
provided. It's too detailed to discuss here in my short version 
of my testimony, but we have made ourselves available and will 
continue to answer as many technical questions as we possibly 
can.
    Let me end now by making one other remark. I think that we 
have all felt strongly that we have a problem here that needs 
to be fixed. What I would like to emphasize is that we fix it 
now. The first really detailed study that we did of the current 
phenomenon was in 1997 based on 1996 dollars, and here were the 
facts then: Medicare's authorization for drugs was $2.3 billion 
that year. We looked at $1.5 billion and found $447 million 
that was probably wasteful. Four years later, looking at the 
data from the year 2000, the amount that Medicare authorized 
for drugs had more than doubled to $5 billion. We looked at 
$3.7 billion, and even the conservative estimate, the catalog 
estimate, we found was double what we found in terms of waste--
possible waste for the government was $900 million and possibly 
as much as $1.9 billion. So every day, every month, every 
period that we don't solve the problem, the problem gets 
bigger, and the Medicare expenditures rise. Thank you.
    [The prepared statement of George F. Grob follows:]
  Prepared Statement of George F. Grob, Deputy Inspector General for 
      Evaluation and Inspections, Office of Inspector General, HHS
    Good morning Mr. Chairman. I am George Grob, Deputy Inspector 
General for Evaluation and Inspections, Department of Health and Human 
Services. I am here today to discuss Medicare payments for prescription 
drugs.
    Medicare pays too much for prescription drugs--more than most other 
payers. The method it uses to determine the amount to be paid is 
flawed. In fact, it makes no sense at all. It allows the price to be 
set arbitrarily by drug manufacturers, not the marketplace. Their 
published wholesale prices for many drugs are far above what suppliers 
and physicians actually pay for them. This allows physicians, for 
example, to make substantial profits from the drugs they administer 
during the course of treatment in their offices. For the year 2000 we 
found that Medicare's authorized payments for 24 leading drugs were 
$887 million more than actual wholesale prices available to physicians 
and suppliers and $1.9 billion more than prices available through the 
Federal Supply Schedule. Until the system is changed, Medicare and its 
beneficiaries will continue to pay excessive amounts for prescription 
drugs; and the amount of excessive payments will increase every year.
         medicare coverage and payments for prescription drugs
    Medicare's coverage of outpatient drugs is limited primarily to 
drugs used in dialysis, organ transplantation, and cancer treatment. 
Medicare also covers certain vaccines and drugs used with durable 
medical equipment such as infusion pumps and nebulizers. However, 
Medicare's total payments for prescription drugs have risen steadily 
over the past decade. In 1992, Medicare paid about $700 million for 
prescription drugs; by 2000, it paid $5 billion. Between 1999 and 2000 
alone, payments increased by $1 billion. This rapid growth illustrates 
the necessity of ensuring that Medicare pays reasonable prices for the 
drugs it covers.
    Physicians and suppliers purchase these drugs, administer or 
provide them to Medicare beneficiaries, and then submit a bill to 
Medicare for reimbursement. In general, Medicare reimburses physicians 
and suppliers for 95 percent of the average wholesale price (AWP) 
published by the drug manufacturers. Of this amount, Medicare 
beneficiaries are responsible for a 20 percent coinsurance payment.
                           excessive payments
    Over the past 4 years, the Office of Inspector General has produced 
a number of reports, all of which have reached the conclusion that 
Medicare and its beneficiaries pay too much for prescription drugs. 
Although it might be sufficient for me to quote only from our most 
recent studies, I would like to summarize all of our work here, because 
it demonstrates the consistency of our findings and the relentless 
growth of the problem.
    A table summarizing the results of our reports is provided on the 
next page, followed by a more detailed description.

                                                    Summary of OIG Medicare Prescription Drug Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Year of Report                             1997         1998         2000         2000         2000         2001         2001
--------------------------------------------------------------------------------------------------------------------------------------------------------
Drugs Reviewed...............................................     22 drugs     34 drugs       5 ESRD    Albuterol     24 drugs    Albuterol     24 drugs
                                                                                               drugs
Year Reviewed................................................         1996         1997         1998         1999         1999         2000         2000
Medicare Expenditures for Reviewed Drugs.....................         $1.5         $2.1         $379         $246         $3.1         $296         $3.7
                                                                   billion      billion      million      million      billion      million      billion
Excessive Payments Based On:
  VA.........................................................                $1 billion         $162         $209         $1.6         $264         $1.9
                                                                                             million      million      billion      million      billion
  Catalogs...................................................         $447                                                $761         $245         $887
                                                                   million                                             million      million      million
  Medicaid...................................................                            $42 million         $120         $425
                                                                                                          million      million
Beneficiary Share of Excessive Payments......................  $89 million         $200  $32 million  $42 million         $320  $53 million         $380
                                                                                million   $8 million  $24 million      million  $49 million      million
                                                                                                                          $152                      $177
                                                                                                                       million                   million
                                                                                                                   $85 million
--------------------------------------------------------------------------------------------------------------------------------------------------------

Drugs in general
    In December 1997, we released a report which compared Medicare 
payments for 22 drugs to actual wholesale prices available to the 
physician and supplier communities. These 22 drugs accounted for $1.5 
billion of the $2.3 billion in Medicare payments for prescription drugs 
in 1996. The wholesale prices were computed using catalogs from drug 
wholesalers and group purchasing organizations which sell drugs to 
physicians and suppliers.
    The report found that Medicare allowances for the 22 drugs exceeded 
wholesale prices by $447 million in 1996. Medicare paid more than the 
available wholesale price for all 22 drugs under review. For more than 
one-third of the drugs, Medicare reimbursement amounts were more than 
double the wholesale prices available to the physician and supplier 
community.
    We followed up this report in November of 1998 by comparing 
Medicare allowances for prescription drugs to prices available to the 
Department of Veterans Affairs (VA) and several other Federal agencies 
through the Federal Supply Schedule (FSS). (The supply schedule 
provides agencies lie the VA with a simple process for purchasing 
commonly-used products in various quantities while still obtaining the 
discounts associated with volume buying. Using competitive procedures, 
contracts are awarded to companies to provide services and supplies at 
the FSS prices over a given period of time.) This report included 34 
drugs which accounted for $2.1 billion of the $2.8 billion in Medicare 
spending for prescription drugs in 1997.
    We found that Medicare and its beneficiaries would have saved $1 
billion in 1998 if the allowed amounts for the 34 drugs were equal to 
prices obtained through the FSS. The potential savings for just one 
drug, leuprolide acetate, accounted for over $275 million. Medicare 
paid more than double the VA for 14 of the drugs. Overall, it paid 
between 15 percent and 1600 percent more than the VA for each of the 34 
drugs. The biggest difference was for the drug leucovorin calcium, with 
a VA price of $1.18 and a Medicare price over $20.
    In January of this year, we released another report comparing 
Medicare reimbursement to prices available to the physician/supplier 
community, the Department of Veterans Affairs, and Medicaid. This time, 
we studied the prices for 24 drugs which represented $3.1 billion of 
the $3.9 billion in Medicare drug expenditures in 1999.
    We found that Medicare and its beneficiaries would have saved $1.6 
billion for these 24 drugs by paying the VA's Federal Supply Schedule 
price. For half of the drugs, Medicare paid more than double the VA 
price. The savings would have been $761 million a year by paying the 
actual wholesale prices available to physicians and suppliers. For 
every drug in our review, Medicare paid more than the wholesale price 
available to physicians and suppliers and the VA Federal Supply 
Schedule price. For example, Medicare reimburses $43 for 10 mg of the 
drug doxorubicin, more than four times the wholesale price of $10. The 
VA pays even less, with a Federal Supply Schedule price of $6.29. We 
also found that Medicare would have saved over $425 million or almost 
15 percent a year for the 24 drugs by obtaining rebates similar to the 
Medicaid program.
    We have recently updated the findings of this report with more 
current drug pricing information. We found that Medicare would have 
saved $1.9 billion of the $3.7 billion it spent for 24 drugs in 2000 if 
the drugs were reimbursed at prices available to the VA. Over $380 
million of this savings would directly impact Medicare beneficiaries in 
the form of reduced coinsurance payments. In some cases, the VA price 
for a drug was less than the amount a Medicare beneficiary would pay in 
coinsurance. More conservatively, Medicare and its beneficiaries would 
save $887 million a year by paying the actual wholesale prices 
available to physicians and suppliers for these 24 drugs. Beneficiaries 
would pay over $175 million less in coinsurance if Medicare paid for 
these drugs based on catalog prices. The potential savings to both 
Medicare and its beneficiaries is probably higher, assuming data for 
all Medicare drugs is similar to that for the 24 we analyzed.
Nebulizer and End Stage Renal Disease (ESRD) Drugs
    In addition to our reports summarizing a number of drugs, we have 
also produced targeted reports on specific nebulizer and end stage 
renal disease (ESRD) drugs that Medicare covers.
    In June 2000, we released a report which looked at Medicare's 
reimbursement of albuterol, a drug used with a nebulizer to treat 
asthma, emphysema, and other respiratory problems. Albuterol is one of 
the top drugs covered by Medicare, with more than $250 million per year 
in Medicare allowances. This report updated the findings of several of 
our prior albuterol studies, all of which noted that Medicare's 
reimbursement amount exceeded prices available through other sources.
    We found that Medicare paid nearly double the Medicaid payment 
amount and almost seven times what the VA pays for one milligram of 
albuterol. Furthermore, nearly every pharmacy we contacted sold generic 
albuterol at prices less than Medicare paid for it. According to our 
survey results, consumers could go to popular drug stores across the 
country and buy a monthly supply of albuterol for around $95. For the 
same monthly supply, Medicare and its beneficiaries would pay a total 
of $118, with Medicare paying $94 and the beneficiary paying the 
remaining $24. The VA's entire monthly payment of $17.50 for albuterol 
is less than just the beneficiary's $24 coinsurance payment under 
Medicare. We calculated that Medicare could save between $47 million 
and $209 million per year by setting prices for albuterol equal to 
those available through these other sources.
    Once again, we have recently updated this report with new pricing 
data. Preliminary findings show that VA prices for albuterol have 
decreased since last year. The VA price for albuterol has fallen by 
more than 50 percent over the last 3 years, from $0.11 per mg in 1998 
to $0.05 per mg in 2001. During the same time period, Medicare's 
reimbursement amount (based on reported average wholesale prices) has 
remained constant at $0.47 per mg.
    In 2000, published wholesale acquisition costs for albuterol ranged 
from $0.09 to $0.18 per mg. These wholesale acquisition costs were 
provided by manufacturers to drug compendiums such as Red Book. The 
Medicare reimbursement rate of $0.47 per mg was anywhere from three to 
five times the wholesale acquisition costs reported by manufacturers.
    Recently, we have begun to look at who actually supplies albuterol 
to Medicare beneficiaries. We found that Medicare reimbursed more than 
6,500 pharmaceutical suppliers for albuterol claims in 2000. However, 
less than 3 percent of these suppliers (184) accounted for 
approximately 80 percent of albuterol reimbursement. Each of these 
suppliers had over $150,000 in paid Medicare claims for albuterol last 
year. Thirty-four of these suppliers were each responsible for more 
than $1 million in Medicare reimbursement for albuterol in 2000, with 
five having between $11 million and $35 million in reimbursement. Thus, 
the vast majority of the albuterol supplied to Medicare beneficiaries 
was provided by suppliers that purchase and bill for a large quantity 
of the product. We believe that suppliers that purchase albuterol in 
such large quantities are likely to receive volume discounts similar to 
those provided to the VA and other large purchasers. Our work in this 
area is continuing.
    Also in June 2000, we released a report comparing Medicare payments 
for ESRD drugs to those of the VA and Medicaid. We focused this 
inspection on five drugs used by renal dialysis facilities to help 
treat renal failure. These five drugs accounted for $379 million in 
total charges to Medicare in 1998.
    We found that Medicare paid between 37 percent and 56 percent more 
than the VA for these drugs. Medicare would have saved up to $162 
million in 1998 if they paid the same amount as the VA for the five 
drugs. Furthermore, Medicare paid between 5 percent and 38 percent more 
than Medicaid. Medicare would have saved as much as $42 million in 1998 
by using Medicaid reimbursement amounts.
                         flawed payment method
    Our reports have shown time after time that Medicare pays too much 
for drugs. Why does Medicare pay so much? We believe that it is because 
Medicare's payment methodology is fundamentally flawed. By statutory 
requirement, Medicare's payment for a drug is equal to 95 percent of 
the drug's average wholesale price (AWP). However, the AWPs which 
Medicare uses are not really wholesale prices.
    For the most part, AWPs are reported by manufacturers to companies 
that compile drug pricing data, such as First DataBank and Medical 
Economics which publishes the Red Book. As our reports have indicated, 
the published AWPs that Medicare uses to establish drug prices bear 
little or no resemblance to actual wholesale prices available to 
physicians, suppliers, and large government purchasers.
    Aside from the obvious problem of inflated AWPs resulting in 
inappropriate Medicare payments, the use of AWP also has other 
potential adverse side-effects. For instance, because physicians and 
suppliers get to keep the difference between the actual price they pay 
for the drug and 95 percent of its AWP, this ``spread'' can serve as an 
inducement for suppliers or physicians to use one brand of drug product 
over another. Thus, publishing an artificially high AWP can be used as 
a marketing device to increase a drug company's market share. Such a 
tactic would increase the profit of the suppliers or physicians who 
purchase the drug because, while not paying the artificially inflated 
AWP amount, they can bill Medicare for it and get paid at that inflated 
amount. While the published AWP does not increase the amount the 
manufacturer receives for each unit of the drug product, it may induce 
an increase in market share because of the higher profits made by 
physicians and suppliers. This in turn increases the profits of the 
drug company. All of this occurs at the expense of the Medicare program 
and its beneficiaries.
    For the drug albuterol, the spread is so large and Medicare 
reimbursement so lucrative that mail-order pharmacies have been tempted 
to capitalize on the difference by making illegal kickback payments to 
durable medical equipment suppliers for patient referrals. A civil 
settlement totaling $10 million has been reached with one pharmacy that 
succumbed to this temptation.
                          physicians' concerns
    Some physician groups have raised concerns about Medicare's 
attempts to lower reimbursement for prescription drugs. For example, 
some oncologists have stated that Medicare does not adequately 
reimburse physicians for the practice costs associated with providing 
treatment to cancer patients. These physician groups say that 
overpayments for prescription drugs simply make up for inadequate 
payments for their practice costs.
    We agree that physicians need to be properly reimbursed for patient 
care. However, we do not believe that the payment of artificially 
inflated drug prices is an appropriate mechanism to compensate them. We 
do not think that the decision as to how much Medicare pays for 
physicians' practice costs should be made by them or by drug 
manufacturers. The Medicare program or the Congress should have 
responsibility for this calculation. We certainly do not believe that 
the basis for their compensation and medical practice expenses should 
be artificially inflated, misleading, and mis-named average wholesale 
prices.
    The Medicare program already has a procedure for determining and 
the amount of paying physicians for their practice costs. If the 
current calculations are incorrect, they should be modified. Physicians 
deserve fair reimbursement for their valuable services. There is no 
reason to resort to a make-believe process to accomplish this.
                options for reforming the payment system
    There are a number of options for revising Medicare's drug 
reimbursement methodology. We recognize that there may not be one 
perfect solution to solving all of Medicare's drug pricing issues. 
However, we believe these options provide reference points for 
considering how to reform the Medicare drug payment system.
    A few general remarks are in order before discussing specific 
options. First, some of the options offer a way to calculate a base 
amount for Medicare reimbursement. These include using the Federal 
Supply Schedule, the average manufacturer's price, or the AWP, for 
example. For each such option, additional sub-options are possible. One 
would be to set Medicare prices at a fixed percentage above or below 
the base. For example, Medicare currently has its payment rate set at 
95 percent of AWP. That percentage could be dropped. Alternatively, if 
the Federal Supply Schedule were used as a base, then Medicare's 
payment could be set at, say, 105 or 110 percent of this number.
    Second, the options are not necessarily exclusive of one another. 
In the Medicaid program, most States set payment rates at a percentage 
below AWP, but they also get rebates from manufacturers. The same could 
be done for Medicare. Another example might be basing Medicare payment 
rates on average manufacturer prices (AMP) (used for calculating 
rebates in the Medicaid program), but making upward or downward 
adjustments on the basis of surveys of amounts paid by of large 
institutional health care providers such as hospitals or managed care 
organizations.
    Each option has its own advantages and disadvantages. Some things 
to consider when comparing them are: the cost of gathering data to set 
the base, the reliability of the data, the time needed to collect and 
analyze it; how easily it can be gamed or misrepresented.
    Logistical considerations are important too, such as: who will 
collect and analyze data, who will propose the Medicare payment rate, 
and how often this will be done; how will the underlying data be 
verified, by whom, and how often; what method will be used to 
periodically update the payment amounts, and how frequently will this 
be done.
    Finally, some broader principles and concerns need to be addressed, 
such as: how proprietary data will be protected; the consequences of 
drug manufacturers, suppliers, wholesalers, and medical care providers 
not providing the needed data or misrepresenting it; ways to minimize 
the burden of public reporting associated with data collection; the 
need for, nature of, and length of a transitional phase in introducing 
the new payment method; and whether any adjustment is needed in the 
practice cost component of Medicare's physician payment rate.
    Keeping these factors in mind, the following options may be 
considered for reforming Medicare's drug payment method:
    1. Authorize a commission to set payment rates. A commission could 
be established similar to MEDPAC, which recommends rate increases for 
Medicare hospital and physician payments and analyzes prices and 
economic trends. Such a commission could recommend a periodic update of 
Medicare prices based on a market basket of drugs, including any new 
drugs. It would be granted authority to require manufacturers to 
provide them with drug wholesale prices, but would not disclose any of 
the proprietary data collected from manufacturers.
    2. Calculate national estimated acquisition costs based upon the 
average manufacturer prices (AMP) reported to the Medicaid program. The 
Centers for Medicare & Medicaid Services (CMS) could calculate 
reimbursement rates using AMP and send these rates out to the Medicare 
carriers. Average manufacturer prices are currently reported to CMS 
under the drug rebate program, and they more accurately reflect the 
prices paid by drug wholesalers to manufacturers. If this option were 
used, it would eliminate the need to go to the manufacturers for more 
pricing information. This option would require legislation to allow 
Medicare access to AMP data. Prior to this option being implemented, it 
would be useful to clarify or refine certain definitions. We also 
believe an initial, intensive effort should be made to audit AMP data 
reported by manufacturers to validate its accuracy. We estimate that in 
the year 2000 Medicare and its beneficiaries would have saved $1.4 
billion of the $3.7 billion spent on just 24 drugs if reimbursement for 
the drugs had been based on AMP.
    3. Collect more accurate average wholesale prices from drug pricing 
catalogs or other sources. This option would entail requiring 
manufacturers or wholesalers to provide their pricing information or 
catalogues to an appropriate commission or federal agency. Protection 
of the confidentiality of proprietary data could be guaranteed in the 
authorizing statute.
    4. Increase the discounting of the published AWP. If this option 
were used, a provision would be needed to prevent manufacturers from 
just raising AWP by an amount greater than the newly discounted rate.
    5. Base payment on physician/supplier acquisition costs. This 
option would require obtaining invoices of actual payments made. 
Payment could not be based solely on the listed invoice price as that 
price often gets discounted by rebates and volume discounts. Net cost 
would need to be obtained and this might be difficult because many of 
the manufacturers rebates are not calculated until the end of the year. 
Additionally, since Medicare would be reimbursing drugs based on cost 
there would be little incentive to get the best price.
    6. Establish manufacturers' rebates similar to those used in the 
Medicaid program. A Medicare rebate program could be modeled on 
Medicaid's program. However, if a Medicare rebate program were used in 
conjunction with, instead of as a replacement for the current AWP 
system, then the rebates should be based on AWP rather than the AMP 
used by Medicaid. This would minimize manufacturers' incentives to 
inflate AWP because rebates would increase as AWP increased.
    7. Create a fee schedule for covered drugs based on the Federal 
Supply Schedule negotiated by the Department of Veterans Affairs. The 
payment amounts could be set at the Federal Supply Schedule price or 
that price plus a certain percentage.
    8. Use CMS's inherent reasonableness authority. This authority 
allows CMS to reduce its payment rates if it can be shown that payment 
amounts are excessive. A recent study by the General Accounting Office 
(GAO), mandated by the Congress, found this authority to be 
appropriate, and it supported some recent studies performed by CMS in 
its proposed used of it. According to the law which mandate the GAO 
study, the inherent reasonableness authority may be used as soon as CMS 
promulgates regulations for it.
    9. Use competitive bidding. The CMS currently has the authority to 
demonstrate the efficacy of competitive bidding for medical supplies. 
The demonstrations have already proven that inhalation drugs can be 
obtained at prices lower than 95 percent of AWP. A statutory amendment 
to make general use of this authority might be appropriate, at least 
for some categories of drugs, particularly those which are provided by 
a small number of suppliers or by mail-order firms.
                               conclusion
    There can be no doubt that Medicare pays too much for prescription 
drugs. This finding has been confirmed year after year. At the same 
time, Medicare payments overall, including excessive amounts, are 
increasing substantially. This adversely affects the Medicare trust 
fund and Medicare's beneficiaries, who are responsible for 20 percent 
of the bill. While no payment method will perfectly address all 
conceivable technical problems, many options are available that are 
superior to the current payment method, with its misleading 
nomenclature and artificially inflated prices. Currently, Medicare 
payments are being set not by the Medicare program but by drug 
manufacturers and indirectly by health care providers. Until this 
problem is corrected Medicare and its beneficiaries will unnecessarily 
pay more and more each year.
    I hope this testimony has been constructive in explaining the 
problem and offering some ideas for its solution.

    Mr. Greenwood. I thank the gentleman and would note that 
even if we passed legislation that was signed into law 
tomorrow, it's probably going to take 6 to 9 months to begin to 
achieve the saving just because of the bureaucratic 
necessities.
    The Chair recognizes Mr. Zachary Bentley, President of Ven-
A-Care Inc., for your testimony, sir.

                TESTIMONY OF ZACHARY T. BENTLEY

    Mr. Bentley. Mr. Chairman, members of the subcommittee, 
good morning. I am Zachary T. Bentley. For the last 13 years, 
I've been an officer and a business manager of Ven-A-Care of 
the Florida Keys, a small pharmacy located in Key West, 
Florida. Early on, I was shocked to receive a payment from 
Medicare for the infusion cancer drug Leucovorin that exceeded 
our costs by approximately 1,000 percent.
    Mr. Greenwood. Mr. Bentley, could you pull the microphone 
just a little closer, please?
    Mr. Bentley. The tenfold profit on this drug being paid for 
by Medicare was so excessive that the beneficiary's 20 percent 
copayment actually exceeded the cost of the drug to Ven-A-Care.
    I attempted to return the payment, only to learn that the 
Medicare carrier did not believe it had made a mistake. The 
prices used by Medicare, Medicaid and many private health 
insurers for setting drug reimbursements are the prices 
reported to those entities by drug manufacturers. We have 
discovered that some, not all, drug manufacturers report 
falsely inflated prices so that their customers will reap 
exorbitant windfall profits.
    In 1991, Ven-A-Care was solicited to enter into a physician 
joint venture designed to split the proceeds of such excessive 
reimbursements with doctors in a position to prescribe 
expensive infusion drugs to AIDS patients. The venture was 
crafted by one of the country's largest health care companies, 
National Medical Care, then a subsidiary of W.R. Grace. We were 
promised by NMC that we would become wealthy if we cooperated. 
We refused because we believed that this proposal was nothing 
more than a kickback scheme, which would ultimately lead to 
overutilization of drugs and possibly patient harm.
    National Medical Care then proceeded with the physician 
joint venture on its own and effectively ran Ven-A-Care out of 
business. Later when Ven-A-Care attempted to rebuild its 
business with a focus on oncology drug therapies, we 
encountered demands that we enter into a similar kickback 
arrangement with oncologists associated with yet another large 
national health care company. Again, we declined to 
participate. Instead, we redoubled our efforts to shine the 
light of day on these shadowy schemes.
    We have worked diligently to educate those who administer 
Medicare and Medicaid programs about this serious problem, 
including personally briefing the previous HCFA Administrator. 
We have assisted the HHS Office of Inspector General, the 
Department of Justice, and have prosecuted false claims actions 
that resulted in the government's nearly $500 million recovery 
against National Medical Care and the more recent $14 million 
Medicaid settlement with Bayer Pharmaceuticals Corporation. We 
also initiated the pending Texas Medicaid false claims action 
against inhalation drug manufacturers Warrick, Roxane and Dey 
Laboratories. Texas Attorney General John Cornyn has joined 
with us in that case.
    Last year we were subpoenaed by your committee to provide 
our information relating to this drug pricing fraud. The 
information we provided reveals some troubling things. A fraud 
scheme costs the government billions of dollars each year and 
encompasses not only chemotherapy drugs, but drugs used for 
inhalation, biologicals, IV fluids, IV antibiotics, and now it 
is in the community retail marketplace.
    Medicare and Medicaid patients are harmed when health care 
providers' decisions to prescribe and dispense drugs are based 
on profit rather than the best interest of the patient. The 
fraud adds to the spiralling Medicaid drug expenditures that 
have forced some States to curtail other needed public health 
services. Medicare patients are defrauded because their 20 
percent copayment alone often exceeds 100 percent of the true 
cost of the drug.
    Americans are being deprived of newer and safer drugs when 
manufacturers inflate price reports of newer drugs to encourage 
physicians to keep prescribing the older drugs. Government 
programs are deprived of the benefits of vigorous price 
competition when expensive drugs become subject to competition 
by generics, other patented drugs or other kinds of treatments. 
Prices drop in the marketplace, but prices reported to the 
government remain at the same level or in some instances 
actually rise. Those drug manufacturers making false price 
representations have effectively usurped the right and duty of 
Congress to determine Medicare drug payments and the right and 
duty of your State legislators and Congress to determine 
Medicaid drug payments. Our existing Medicare drug 
reimbursement system is broken only because some, not all, drug 
companies have chosen to falsely report inflated prices.
    And finally, no expanded Medicare drug benefit can 
successfully be implemented unless drug companies are required 
to tell the truth about their prices.
    Thank you very much. I'll be happy to answer any questions.
    [The prepared statement of Zachary T. Bentley follows:]
Prepared Statement of Zachary T. Bentley, President, Ven-A-Care of the 
                           Florida Keys, Inc.
    Mr. Chairman and Members of the Subcommittees: Good morning. I am 
Zachary T. Bentley.
    For the last thirteen years I have been an officer and the business 
manager of Ven-A-Care of the Florida Keys, a small pharmacy located in 
Key West, Florida. Early on, I was shocked to receive a payment from 
Medicare for the infusion cancer drug, Leucovorin, that exceeded our 
cost by approximately 1000%. The ten-fold profit on this drug, being 
paid for by Medicare (80%) and the beneficiary (20%), was so excessive 
that the beneficiary's co-payment actually exceeded the cost of the 
drug to Ven-A-Care. I thought the Florida Medicare carrier had made a 
mistake. I attempted to return the payment, only to learn that the 
Medicare program in fact assumed that the cost of Leucovorin was many 
times greater than the true price available to even a small company 
such as Ven-A-Care.
    We communicated pricing information about Leucovorin and other 
drugs which we discovered had similar pricing and reimbursement 
disparities, to the Health Care Financing Administration and other 
federal and state agencies, in an effort to alert them to the problem. 
We learned that the prices used by Medicare, Medicaid, and many private 
health insurance programs for setting drug reimbursements were the 
prices reported to those entities by the drug companies. When the 
manufacturers report falsely inflated prices, providers reap exorbitant 
windfall profits. Those windfall profits serve the drug manufacturers 
as government-funded kickbacks to induce the providers to order their 
drugs.
    I must emphasize, however, that not all pharmaceutical 
manufacturers engage in this nefarious scheme.
    In 1991, Ven-A-Care was solicited to enter into a physician joint 
venture designed to split the proceeds of such excessive reimbursements 
with doctors in a position to prescribe expensive infusion drugs to 
AIDS patients. The venture was crafted by one of the country's largest 
healthcare companies, National Medical Care, then a subsidiary of WR 
Grace. We were promised by NMC that we would become wealthy if we 
shared drug revenues with the treating physicians, because they would 
order large quantities of pharmaceuticals that cost far less than the 
reported prices. We believed that this proposal was nothing more than a 
kickback scheme, which ultimately would lead to over-utilization of 
drugs and possibly to patient harm, and we elected to not participate. 
National Medical Care then proceeded with the physician venture on its 
own and effectively ran Ven-A-Care out of business.
    Later, when Ven-A-Care attempted to rebuild its business with a 
focus on oncology drug therapies, we encountered demands that we enter 
into similar kickback arrangements with oncologists associated with yet 
another large national healthcare company. Again, we declined to 
participate. Instead, we redoubled our efforts to shine the light of 
day on these shadowy schemes.
    We learned that almost every third-party payer, including Medicare, 
Medicaid, the Federal Employees Health Benefits Plan, and most private 
insurers, relied on the drug companies' representations of drug prices 
when setting the reimbursement amounts paid to providers. It became 
apparent to us that many drug manufacturers reported truthful prices, 
while others falsely inflated their price reports so that their 
targeted customers--oncologists, urologists, home care companies, ESRD 
providers, DME companies, and others--would be induced by the resulting 
windfall profits to order their drugs.
    We have worked diligently to educate those who administer the 
Medicare and Medicaid programs about this serious problem, including 
personally briefing the previous HCFA Administrator. Ven-A-Care also 
has taken direct action to stop this major hemorrhage of tax dollars. 
We have assisted the HHS Office of Inspector General and the Department 
of Justice and have prosecuted False Claims actions that resulted in 
the government's nearly $500,000,000 recovery against National Medical 
Care/Fresenius and the more recent $14,000,000 Medicaid settlement with 
Bayer Pharmaceutical Corporation.
    We also initiated the pending Texas Medicaid false claims action 
against Schering Plough's Warrick drug division, Boehringer Ingelheim's 
Roxane drug division, and Dey Laboratories. Each of those companies 
manufacture inhalation drugs used to treat severe respiratory ailments. 
Texas Attorney General John Cornyn has adopted our claims, and we are 
currently assisting him in that litigation. The Texas Medicaid Program 
has led the Nation in its efforts to secure accurate price reports from 
drug companies by requiring written certification of a range of prices.
    Last year, pursuant to subpoena, we provided to the House Committee 
on Energy and Commerce our documents and other evidence relating to the 
inflation of price reports by certain drug companies. In preparing for 
my testimony today, I have again reviewed the information now in the 
Committee's possession. The Committee's commendable oversight and 
investigative efforts have alerted the Congress and the public to the 
following issues:

1.) The evidence reveals that the fraud scheme encompasses a wide range 
        of drugs including chemotherapy, inhalants, biologicals, IV 
        fluids, and, IV antibiotics. More recent reports reveal that 
        the fraud is also directed at oral drugs reimbursed by Medicaid 
        and which will be the focus of an expanded Medicare drug 
        benefit.
2.) Falsely inflated drug price representations enrich certain health 
        care businesses, including some drug companies, home care 
        pharmacies, oncologists, and inhalation providers, while 
        cheating Medicare beneficiaries of their current drug benefits. 
        This shameful fraud levies a cruel tax on Medicare 
        beneficiaries, whose 20% co-payment alone often exceeds 100% of 
        the true, reasonable cost of the drug to health care providers.
3.) This fraud compromises the health and safety of Medicare and 
        Medicaid patients. The excessive reimbursements are used as 
        inducements to physicians and other health care providers in a 
        position to cause the companies' drugs to be ordered. 
        Oncologists and other providers are thus financially induced by 
        certain drug manufacturers to prescribe such vital drugs as 
        chemotherapies, not on the basis of what is best for the 
        patient, but based on what is most profitable for the medical 
        provider. Such kickback schemes impair independent medical 
        judgment and interfere with the physician/patient relationship. 
        A case in point involves the prostate cancer drug Lupron, 
        manufactured by TAP Pharmaceuticals, a joint venture between 
        Japan's Takeda Pharmaceutical Company and Abbott Labs. Recently 
        announced criminal indictments of several urologists 
        illustrates the seriousness of the problem.
4.) The price fraud costs Medicare and Medicaid billions of dollars 
        each year in the form of excessive reimbursements and over-
        prescribing of medications.
5.) False, inflated drug price representations effectively deprive 
        Medicare and Medicaid patients of access to medical care 
        because:
    a.) Seniors are overcharged in their co-payments and thus have less 
            money available to purchase other needed drugs not covered 
            by Medicare.
    b.) Scarce health care program dollars are diverted to fund these 
            overpayments and kickbacks that benefit practice 
            specialties in a position to increase drug company sales. 
            The Wall Street Journal reported last February 7 that 
            ``states say the drug-cost component of Medicaid is rising 
            more than 20% annually,'' forcing states to cut funding for 
            other services. Missouri budget director Brian Long told 
            the Journal that Medicaid costs are responsible in part for 
            his state's inability to fund increased costs for school 
            transportation and special education. An Ohio budget 
            official said ``The rest of state government is 
            dramatically impacted'' by rising Medicaid drug costs. 
            Similarly, scarce Medicare dollars are diverted and thus 
            not available, therefore, to increase reimbursements to 
            other practice specialties such as cardiology, surgery, and 
            gynecology.
6.) Certain drug manufacturers and health care provider groups have 
        actively misled Congress and the Medicare and Medicaid programs 
        in an effort to conceal and perpetuate this fraud. Examples 
        include
    a.) Seeking to deflect scrutiny by contending that Congress and the 
            Executive Branch have created a flawed reimbursement 
            system. This argument is specious, because the system works 
            well as long as drug companies tell government insurance 
            programs the truth about their prices. If a flaw exists, it 
            is the fault of the drug companies who choose to give the 
            government false prices.
    b.) Contending that the inflated reimbursements are needed to 
            defray other provider costs not adequately covered. Some 
            health care providers may be justified in requesting higher 
            reimbursements. The recent GAO study, however, will confirm 
            that the drug companies in question (and I reiterate that 
            not all drug companies are guilty of this practice) have 
            generated exorbitant reimbursement schedules for certain 
            drugs. The scheme benefits only the companies and their 
            provider customers, to the detriment of government health 
            insurance programs and patients. These inflated 
            reimbursements are created only when a drug company desires 
            to fend off competition; they are not calculated to cover 
            administration costs, and they far exceed any reasonable 
            level of reimbursement.
    c.) Some health care professionals have stooped to extortion 
            tactics by threatening that they cannot continue to care 
            for cancer patients if their gravy train is derailed. The 
            false premise for this threat is revealed by the fact that 
            those same health care professionals were making the drugs 
            available to patients before manufacturers contrived to 
            create such lucrative ``spreads'' to stave off competition 
            by other manufacturers.
      I find it offensive that the drug companies that are engaging in 
            these practices have tried to conceal their actions while 
            at the same time piously holding themselves out as stewards 
            of the public good. In fact, the sub-committees' subpoenaed 
            records reveal that one major drug manufacturer inflated 
            price reports for a broad range of cancer drugs while 
            touting itself as America's ``most admired'' pharmaceutical 
            company.
7.) The federal government and many states have taken action to improve 
        reimbursement systems by requesting additional price data. For 
        example, California often bases payments on manufacturers' 
        reports of direct prices and submission of manufacturer 
        invoices; Texas requires written certification of different 
        kinds of prices and costs; many States rely on reports of 
        Wholesaler Acquisition Cost rather than AWP; HHS regulations 
        were modified to provide for a federal Medicaid Upper Limit; 
        and Congress enacted the Medicaid rebate law. Each of these 
        efforts, however, has been circumvented and frustrated by 
        certain drug companies that falsely inflate any form of price 
        or cost data the government attempts to use to set 
        reimbursements.
8.) The fraud scheme deprives government programs of the benefits of 
        vigorous price competition that occurs when expensive drugs 
        become subject to competition by generics, other patented 
        drugs, or other kinds of treatments. Prices drop in the 
        marketplace, but prices reported to the government remain at 
        the same level, or rise. As a result, Medicare, Medicaid and 
        the public are misled to believe that the drugs remain highly 
        expensive when in fact they sell for a fraction of their pre-
        competition prices. The current example of the cancer drug 
        Taxol is illustrative. When Taxol's patent protection expired 
        recently and a competing generic drug entered the market, the 
        prices of both drugs began to fall. Nevertheless, the reported 
        prices remained at the pre-competition level, creating a 
        ``spread'' that is used to market both drugs, and government 
        health insurance programs have not benefitted from the reduced 
        (but unreported) prices set by the marketplace. It is ironic 
        that there was no ``spread'' before Taxol had a generic 
        competitor, but now a ``spread'' exists and is used to market 
        both drugs.
9.) Those drug manufacturers making false price representations have 
        effectively usurped the right and the duty of Congress to 
        determine Medicare drug payments, and the right and duty of 
        state legislatures and Congress to determine Medicaid drug 
        payments. Increased oversight by the Congress and enforcement 
        by the Executive Branch, have resulted in at least two drug 
        manufacturers reporting markedly lower prices to the Medicaid 
        Programs, however, even those companies continue to report 
        inflated prices for Medicare purposes.
    After concluding the first stage of its investigation last year, 
Congress enacted legislation requiring the General Accounting Office to 
investigate and report on the true costs of the drugs in question and 
the expenses incurred by health care providers in administering them. 
The legislation also requires the recently renamed Center for Medicare 
and Medicaid Services (CMS), formerly known as the Health Care 
Financing Administration (HCFA), to review the GAO report when issued 
and take appropriate action with respect to Medicare drug 
reimbursements. State Medicaid programs already have taken actions 
based on the results of investigations by the Department of Justice and 
the National Association of Medicaid Fraud Control Units, and many of 
those programs have already reported saving tens of millions of dollars 
as a result. I am hopeful, that after considering the GAO report, CMS 
Administrator Thomas Scully will take similar action to stop these 
excessive payments that are costing the Nation's health care systems 
billions of dollars each year.
    In conclusion, the evidence amassed by the sub-committees 
demonstrates without doubt: No drug reimbursement system will succeed 
unless drug companies tell the truth about their prices. Our existing 
Medicare Drug Reimbursement System is broken because certain drug 
companies lack honesty and integrity. Any expanded drug benefit will be 
doomed to fail if those same companies continue to lie about their 
prices.
    Thank you for the opportunity to bring to the sub-committees' 
attention this widespread, institutionalized fleecing of Medicare, 
Medicaid and other health care programs funded by the American 
taxpayer.
    I will be happy to answer any questions the sub-committees may 
have.

    Mr. Greenwood. Thank you for your testimony.
    The Chair recognizes himself for 5 minutes for questions, 
and would refer to document N1 and ask the staff to have that 
projected. That's the document that was projected earlier.
    N1. Staff, N1. There we go.
    Let me start with you, Mr. Bentley, and let us look on that 
chart at Mitomycin. Mitomycin is what kind of drug, Mr. 
Bentley?
    Mr. Bentley. It's a chemotherapy agent.
    Mr. Greenwood. It's a chemotherapy agent.
    Let me understand--let me make sure that I understand and 
we all understand this chart. Your company, Ven-A-Care, the one 
to purchase that drug, at catalog price from the manufacturer 
would pay $180. Is that correct?
    Mr. Bentley. Yes, sir.
    Mr. Greenwood. Okay. And the Red Book, the document that 
Medicare uses in order to determine the reimbursement to the 
physician, then is posted by the manufacturer at $869.33. Is 
that correct, sir?
    Mr. Bentley. That is the Medicare allowable, which would be 
95 percent of the AWP that is posted in the Red Book.
    Mr. Greenwood. So Medicare pays $869 to the physician for a 
product that he paid $180 for--95 percent of that?
    Mr. Bentley. Correct.
    Mr. Greenwood. So the overpayment is in the vicinity of 680 
some dollars Medicare is overpaying for that drug?
    Mr. Bentley. Yes, sir.
    Mr. Greenwood. Now, let us look at the impact of that 
particular chemotherapy drug on the patient. The patient's 
requirement under Medicare is to pay 20 percent, 20 percent 
copay. If, in fact, the copay was based on the--what was 
actually paid for the product, I would assume that that would 
be a $36 cost. Is that correct?
    Mr. Bentley. Yes, sir.
    Mr. Greenwood. Okay. Instead, the copayment is $173.86, 
which I would calculate is $137 more than the patient should 
pay in copayment. So the patient gets ripped off for $137. And 
whether or not we believe that the oncologists--and I do 
believe that the oncologist needs to recover more than we're 
paying him now. I'm looking at the patient here. What if the 
patient doesn't have the $173.86? What if the patient could 
afford $36 for the treatment, but doesn't have the $173. What 
happens?
    Mr. Bentley. That's correct.
    Mr. Greenwood. The patient could conceivably do without 
treatment.
    Mr. Bentley. That's correct. Or other family members may 
have to help pay the successive copayment amount, which only 
puts a burden on other family members when a loved one has 
cancer. And I would also say that Mitomycin is also paid to 
pharmacies by the DMERC's under Medicare, not just oncologists.
    Mr. Greenwood. Let me pose this question to Mr. Scanlon. 
Mr. Scanlon, the crux of this whole--there is no question that 
AWP system is broken. I've talked to every pharmaceutical 
company that I could find. They all agree. I've visited my own 
oncology doctors in my county. They agree that the system 
doesn't--that the system doesn't make sense as it's 
constituted. There is this question of whether the oncologists 
in particular and other providers are undercompensated and what 
we need to spend to pay them fairly.
    Is it your testimony that--what was the figure in your 
report for the overpayment to oncologists for these drugs? What 
was that number?
    Mr. Scanlon. It's approximately $530 million.
    Mr. Greenwood. $530 million----
    Mr. Scanlon. Based on the conservative estimate of----
    Mr. Greenwood. $530 million per year, half a billion 
dollars a year just for oncological products.
    And, sir, what does your study reveal as to what it would 
cost to bring oncologists up to the rest of the medical 
profession in terms of the way they're compensated by Medicare?
    Mr. Scanlon. There are a number of elements in that. I 
mean, to put the oncologist on par with other physician 
specialties, first of all, there's the issue of the adjustment 
of their fees for chemotherapy administration and the 
substitution of an alternative method for the basic method. 
Restoring the basic method would add about $31 million to their 
payments.
    Oncologists have also raised issues about an adjustment 
that HCFA made in terms of their supplies, and they've 
indicated that they believe that HCFA has reduced their supply 
estimates too much in terms of taking the drug costs out of 
what was reported in the survey data used to set up the fee 
schedule. We don't have a firm estimate of what supply expenses 
should be. The oncology profession has indicated that it should 
be about double of what HCFA uses, which would add another $20 
million to oncology payments.
    Other issues that they raise, we cannot make an estimate 
now as to what impact that might have on their fees, and as I 
indicated, they might not have a big impact at all because 
other specialties might have the same types of issues, in terms 
of practice expense, keeping pace with changes in practice.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentleman from Florida Mr. Deutsch for 5 minutes.
    Mr. Deutsch. Thank you, Mr. Chairman.
    Mr. Scanlon, if I can follow up on that, because I think 
one of the interesting things in your very, you know, 
insightful testimony was really this whole issue of the 
alternative approach. I mean, there's a clear consensus it's 
broken. How do we fix it? I mean, specifically, if you can 
elaborate. You were starting to elaborate in terms of the 
physicians themselves, the reimbursement, the AWP 
reimbursement. I mean, can you offer some specific suggestions 
to us?
    Mr. Scanlon. Well, in terms of the physician payments for 
chemotherapy administration and other services that don't 
involve a physician directly, to restore the basic method, what 
it means is that you use differences in the resources--the 
types of inputs--that are needed to provide a different service 
as the basis for determining Medicare fees. The alternative 
method that was used by HCFA involved the substitution of 
historical charges, what physicians actually charge, and which 
oncologists have said were based on the past and do not reflect 
current experience or practices in the delivery of these kinds 
of services. So we believe in substituting information about 
actual resources that are required, that HCFA has developed 
through expert panels and may need to update through additional 
expert panels to keep current, but that kind of information is 
key to put the physician fees on par with----
    Mr. Deutsch. If I can follow up on that, your study points 
out almost a 10-to-1 differential between hat government--what 
we would save or what Medicare would save if we changed up AWP 
versus switching the physician payment. The oncologist group--
and I don't know if they are going to testify to this later, 
but I'm aware of at least a study that they did, not as 
extensive as yours, which was saying it was almost a 1-to-1 
tradeoff. Have you looked at their study, and how do you 
respond?
    Mr. Scanlon. We have looked at their study. We have not 
been able to replicate their study, but at the same time we 
have concerns about the method of the study. I mean----
    Mr. Deutsch. That is obviously a pretty big differential.
    Mr. Scanlon. There is no question about it. There's a 
number of differences in terms of what we've done and what they 
have done. We have built this estimate based upon all the 
services physicians provide, which we think is key to 
understanding this problem. The physician fee schedule is a 
relative value fee schedule. It sets fees for one service based 
on the comparison of the resources required for it versus other 
services, and it distributes an amount of money that we found 
to be adequate in order to get physician participation in 
Medicare. So that's the criteria for setting physician fees.
    To build an estimate of expenses from looking at individual 
procedures is not nearly the same, because what it ignores is 
the fact that the fees that become paid to a physician includes 
three components. One is the practice expense component. The 
second one is the physician work component, for which there is 
no comparable sort of accounting cost, and that accounts for 
over half the fee. And the third thing is the malpractice 
expense component. So in some respects it becomes--when you 
start to look at this as a piece, you have the potential of 
being misled, and it's much more important to look at this in 
the aggregate.
    Mr. Deutsch. If I can sort of open this up to each of you 
individually, and let me also welcome Mr. Bentley as a 
constituent. I'm glad you made your way up to Florida. It's not 
as easy--from Florida. It's not as easy as it used to be. 
Hopefully that will change.
    But in my opening statement I mentioned what I think in 
some ways is as big, if not the biggest, concern is the 
substitution based on market forces, and we all can, you know, 
come up with theories that it's going on. Do we have empirical 
or even anecdotal evidence that, in fact, there has been 
substitution based upon the increased spread of particular 
drugs? I mean, do we have either anecdotal or empirical 
evidence, besides theoretical evidence, which clearly we do 
have? If you don't know, that's fine.
    Mr. Bentley. I believe there is evidence that----
    Mr. Deutsch. Can you point to anything specific that you're 
aware of?
    If you can pull the mike closer as well. It gives--I mean, 
we can all see that it should be occurring, or it could be 
occurring. Obviously we hope it's not occurring.
    Mr. Bentley. This was part of a drug I was referring to in 
my opening statement, which is a new version of an older drug 
called Vepesid, which is----
    Mr. Greenwood. Mr. Bentley, why don't you lift your 
microphone up. I know everyone wants to hear you. And make it--
speak as directly into the microphone as you can. Point it 
toward your----
    Mr. Bentley. Okay. This is an internal Bristol-Myers Squibb 
document that shows Etopophos, which is a second-generation 
etoposide that was developed, and they say that it's clearly 
superior to that of etoposide and for various reasons. And then 
they go on to the next document, where it says, the Etopophos 
product profile is significantly superior to that of etoposide. 
Now, what they were concerned about was there was a big spread 
already in etoposide, so how were they going to market and sell 
the better, in their own words, clinically superior, second-
generation drug?
    Now, they admit right here, currently physician practices 
can take advantage of the growing disparity between Vepesid--
that's etoposide--list price and subsequently the average 
wholesale price, AWP, and the actual acquisition cost when 
obtaining reimbursement for etoposide purchases. If the 
acquisition price of Etopophos is close to the list price, the 
physicians' financial incentive for selecting the brand is 
largely diminished.
    And they go through some different scenarios. And I can 
tell you right now that the spread differential on etoposide, 
as was pointed out earlier, Medicare is reimbursing 
approximately $135 for the old version of etoposide, and it 
costs less than $10. And literally we have a, quote, clinically 
superior drug that Bristol-Myers Squibb has been unable to 
market because of the spread on the older version of the drug.
    Mr. Greenwood. Your time is----
    Mr. Deutsch. Can I just ask a very short follow-up 
question?
    Mr. Bentley. Sure.
    Mr. Deutsch. And I know my time is expired. I guess I have 
a copy of this, and it's up there. I'm just curious. You were 
able to ascertain this information through your whistleblower 
lawsuit. How were you able to----
    Mr. Bentley. This--I obtained this from the Justice 
Department, cooperating with them. They obtained this by an OIG 
subpoena issued to Bristol-Myers Squibb.
    Mr. Greenwood. The time of the gentleman has expired.
    The Chair recognizes for 10 minutes the gentleman from 
Florida, the chairman of the Health Subcommittee, Mr. 
Bilirakis.
    Mr. Bilirakis. Thanks, Mr. Chairman.
    Mr. Bentley, the Mitomycin that's on that chart, 40 
milligram, and the dollar figures attached thereto, how many 
doses is that? Is that one dose?
    Mr. Bentley. Well, that's one vial. Depending on how it is 
administered, that could take two or three vials to equate to a 
dose.
    Mr. Bilirakis. All right. So if it took 2 or 3 vials for 
one dose----
    Mr. Bentley. You multiply all of those figures times 2 or 
3. And if I can interject to shine some light on some previous 
remarks that were made, the Mitomycin, that AWP, that was 
established by the drug manufacturers, and that is what 
Medicare is relying on to determine the reimbursement. And I 
can tell you I have examined tens of thousands of internal drug 
company documents, and there is not one scintilla of evidence 
that shows that the drug companies established an inflated 
price for Mitomycin in order to offset practice expense for 
oncologists or to give the pharmacists any more money. It 
just--that is not the focus.
    Mr. Bilirakis. So who created the AWP, then? Is it created 
by HCFA, by HHS, by----
    Mr. Bentley. It's been around, sir, for the better part, 
that I'm aware of, about 40 years. And for a great number of 
those years, it's always worked, and there are still a great 
number of companies, Merck, Lilly, Johnson & Johnson, DuPont, 
who do not engage in this type of gaming the system. When they 
make a representation about the price of the drug, you may not 
like it because it may be high, but that's the price they sell 
it for.
    Mr. Bilirakis. Let me ask you, about the $180 figure which 
is the Ven-A-Care cost. Is HCFA, in your opinion, aware that 
that's really all that it cost?
    Mr. Bentley. I think they are now, sir.
    Mr. Bilirakis. Mr. Scanlon, are they aware of it?
    Mr. Scanlon. Yes, Mr. Chairman.
    Mr. Bilirakis. Have they been aware of it?
    Mr. Scanlon. They have been aware of it, and last year they 
did take steps to try and change this, but then because of 
concerns raised by providers, they backed off and----
    Mr. Bilirakis. Concerns raised by providers to HCFA?
    Mr. Scanlon. About the imbalance between the drug prices 
and the drug administration compensation.
    Mr. Bilirakis. Concern was raised by providers, being----
    Mr. Scanlon. Yes, sir.
    Mr. Bilirakis. [continuing] let us say in that case the 
oncologists?
    Mr. Scanlon. Yes, sir.
    Mr. Bilirakis. Mr. Grob, do you agree with that?
    Mr. Grob. That's correct.
    Mr. Bilirakis. Because concerns were raised by providers, 
it just remained status quo?
    Mr. Grob. The status quo has remained. In fact, the 
Congress required that it remain that way.
    Mr. Bilirakis. That's what I want to get to. The Congress 
did what?
    Mr. Grob. The Health Care Financing Administration had 
advocated making available more realistic drug prices to the 
carriers, but because of the concerns that were raised, the 
Congress placed a moratorium on any reductions in those prices, 
and it commissioned the study of the General Accounting Office.
    Mr. Bilirakis. And that's what we have today. I'm almost 
speechless.
    Is there a substitute or an equivalent drug that will do 
the same job Mitomycin will do? Mr. Bentley?
    Mr. Bentley. I'm not a pharmacist. I'm not--I don't know. 
Really my expertise is on pharmaceutical pricing and the 
economics.
    Mr. Bilirakis. Do any of you know?
    Mr. Grob. I don't know, Mr. Chairman.
    Mr. Scanlon. Nor do I.
    Mr. Bilirakis. Mr. Grob, do you know, can HCFA, the 
administration, HHS, et cetera, et cetera, can they fix this in 
a way that it should be fixed? You know, and I'm not--I realize 
this is more complex. It's certainly not a simple situation, 
but can they fix this? Do they have the power to fix this, or 
does it have to be Congress?
    Mr. Grob. Theoretically, CMS does have the power through an 
authority called their ``inherent reasonableness'' power, which 
allows them to conduct studies to determine what the true 
prices are, and if there is a price that is, as the phrase 
says, inherently unreasonable, they can reduce it. However, 
that's a very lengthy process to conduct the studies. The 
studies are almost----
    Mr. Bilirakis. Yeah. But then we get the figures up there, 
the 7 cents for the one and 94 cents for the $1.20. What kind 
of studies are we talking about?
    Mr. Grob. Well, they would be studies to determine what the 
market prices are, what comparable prices are.
    Mr. Bilirakis. But those are the prices, aren't they?
    Mr. Grob. We believed for some time that there's good, 
strong evidence for reducing those prices, and CMS would have 
that authority. And, in fact, CMS had the means even just by 
making the prices available to the carriers to do it, but there 
has always been resistance to this.
    CMS to its credit in the past had advocated other ways to 
deal with the high prices e.g., to increase the discount on the 
AWP, but these proposals----
    Mr. Bilirakis. I guess my time did expire. I'm sorry, Mr. 
Chairman. I didn't notice that.
    Mr. Greenwood. Thank you.
    We are going to collect a dollar for the firefighters of 
New York for everyone who says HCFA for the remainder of this 
hearing.
    Is the gentleman Mr. Brown available for questioning now?
    In that case, the gentleman from New Jersey Mr. Pallone. 
He's recognized for 5 minutes.
    Mr. Pallone. Thank you, Mr. Chairman, and, Mr. Bentley, I 
just want to continue with some of these documents in an effort 
basically to show that, you know, companies consider doing 
what's right, but then they choose to do what's wrong, so to 
speak. And if I could ask that we successfully look at, I 
guess, B-1, B-2 and B-3, and we'll start out with B-1, which is 
an internal Glaxo document. And I just wanted to--you know, Mr. 
Bentley, if you just wanted to comment on that first document 
in this regard.
    Mr. Bentley. Sure. This is very interesting. Glaxo was the 
first company to market the antiemetic Zofran that's used to 
control nausea and vomiting in chemotherapy patients. And they 
had a natural monopoly for a number of years, because they had 
the only drug that was FDA-approved for this indication. And in 
approximately 1995, SmithKline came out with a competing drug, 
not a generic, but a drug that was effectively controlling 
nausea and vomiting. And Glaxo noticed that their market share 
declined dramatically right from the onset of the introduction 
of Kytril. Now, they expected obviously they were going to lose 
some market share, because there was competition in the 
marketplace. They didn't expect to lose the amount that they 
had lost so rapidly. And the marketing department told Glaxo, 
well, it was an easy answer. Physicians were actually being 
courted by SmithKline representatives to switch from Zofran to 
Kytril based on the opportunity to make money from Medicare and 
Medicaid.
    So they came up on some proposals on how they were going to 
level the field and this was an internal memorandum. Obviously 
somebody with some conscience in Glaxo was concerned about the 
ramifications of what Glaxo was proposing to do and that was to 
raise the net wholesale price in AWP, which would effectively 
increase the amount paid by Medicare and Medicaid while 
simultaneously lowering the price to physicians and to 
specialized pharmacies like Ven-A-Care in order to create a 
spread to compete with SmithKline's competing product, and that 
spread that they were going to compete with was not their own 
money. It was the government funds being used to fund a 
kickback essentially for their marketing efforts to compete 
with SmithKline, and they were obviously very concerned about 
what Congress was going to look at.
    Mr. Pallone. This was the second document, right, B-2? Oh, 
we are still in B-1, okay.
    Mr. Bentley. The next document shows what Ven-A-Care 
received in the mail from Florida Infusion announcing this 
great revolution, and that was Glaxo had raised the AWP but 
lowered the price, effectively creating a spread to induce Ven-
A-Care and physicians to go back to Zofran for those that were 
using the competing Kytril.
    Mr. Pallone. Then let us go to B-3. This is the Smith Kline 
document where, I guess what is it called, Health IQ, where 
they talk about possibly turning Glaxo into Medicare and that 
that might be a reasonable approach but then they worry about 
the whole industry going down. Do you want to comment on that?
    Mr. Bentley. Yes. This is interesting because there was 
actually a series of letters written by Health IQ under the 
letterhead Physician Home Care Associates, and they were 
written to every medical director of the Medicare Part B 
carriers and to the Medicaid medical directors and they were 
ostensibly representing themselves as this great group that 
represented home care doctors and pharmacies. However, it was 
nothing more than a lobbying group that was being paid for by 
SmithKline, and if you look at bullet point No. 4 it says from 
the communication received to date the letters received by 
Physician Home Care Associates, ostensibly written on behalf of 
physicians and other health care providers, appear to be 
greatly appreciated by the medical director. That is the 
Medicare Part B directors. A follow-up letter apprising 
Medicare of an increasing in Glaxo's AWP and a proffered 
discount to purchasers which would seem to benefit providers 
might appear peculiar and prompt questions as to the true 
identity of Physician Home Care Associates.'' And then they go 
on that they----
    Mr. Pallone. Read that next section.
    Mr. Bentley. Sure. ``As a result of these issues raised 
above, Health IQ's concern that highlighting the difference 
between the actual acquisition cost and the published AWP may 
not only increase attention to Glaxo's pricing practices but 
may provide the impetus for HCFA to implement a system that 
could impact not only reimbursement of antiinfectives but all 
pharmaceutical and biological products. The ramifications could 
extend well past Medicare to include Medicaid programs also 
administered by HCFA as well as private payers who tend to 
mimic policies and procedures implemented by public payers.''
    Mr. Pallone. Obviously that was the point that they were 
concerned that the whole industry was going to go down.
    Mr. Bentley. Absolutely.
    Mr. Pallone. Thank you. Thank you, Mr. Chairman.
    Mr. Greenwood. Thank you. I recognize for purposes of 
inquiry the chairman of the full committee, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. First let me 
respond to concerns that we have somehow questioned the motives 
of any physicians involved in this payment system. First of 
all, the concerns expressed by oncologists as we have reviewed 
this matter was to the effect that if we did not simultaneously 
repair the deficiencies in practice reimbursements under the 
Medicare system while we are curing the unfairness of the 
system that reimburses way beyond the cost of the medicines 
that are provided to Medicare patients that we would be 
disrupting the provision of health care services to patients in 
America. That is a real concern of this committee, and so let 
me turn quickly to the--I guess to the first question for the 
GAO. The numbers you have submitted to us is that practice 
reimbursements are about $51 or so million dollars short; is 
that correct.
    Mr. Scanlon. The adjustments that we think should be made 
would approximate that.
    Chairman Tauzin. I understand Mr. Scully is going to put a 
figure of about $48 million or so. It seems the two of you are 
close, but even if you multiply the numbers you have given us 
by three, if you provided reimbursements to the physicians 
three times what you estimate is a shortfall at $150 million, 
we are still talking about overpayments of a billion dollars. 
So if we correct the overpayment problem in the system because 
of this artificially high AWP wholesale price posting, there is 
ample room, then, to correct the deficiencies that you and Mr. 
Scully have found in the payment to physicians for services; is 
that correct?
    Mr. Scanlon. That is correct.
    Chairman Tauzin. So that in correcting this problem, if we 
handle it properly, if we make adjustments for physicians' 
practices three times as much as you estimate is a shortfall, 
we could still save the system $850 million or more each year 
in the overpayments for these drugs; is that correct?
    Mr. Scanlon. That is correct, but I would also note, Mr. 
Chairman, the changes that we have talked about in terms of 
implementing the fee schedule as you have specified do not 
involve an additional expenditure because the fee schedule has 
been budget neutral. If you decide to increase----
    Chairman Tauzin. The problem there is it would come out of 
other physicians' reimbursements. So if we added to that pool, 
three times what you recommended as the deficiencies paid to 
these physicians so that it could be spread out more equitably 
without denying other physicians their reimbursements, we would 
still save $850 million to the Treasury in the----
    Mr. Scanlon. You could still save considerable money.
    Chairman Tauzin. Let me turn to the other issue that 
disturbed me so much, and I want to tell my friends Mr. Ganske 
and Mr. Norwood that I didn't make these comments lightly and I 
stand by them. I am looking at the IG report now that is number 
Q-1. It contains some rather chilling language. It says in that 
report a review of 22 skilled nursing facilities, that at these 
facilities $4.8 million out of the $9 million in claims, 53 
percent were not medically necessary. They went on to say that 
in addition financial effects we noted about overutilization 
and overpricing were potentially harmful to the patients. 
``Medical reviewers who were part of our audit''--this is a 
quote. ``Medical reviewers who were part of our audit concluded 
that patients receiving unnecessary infusion services were 
placed at undue risk for complications,'' and it went on to 
say, ``Furthermore, infusion services are invasive procedures 
that are painful and when unnecessary reduce the quality of 
life.''
    That IG study, did it not, also went on to say that maybe 
one of the inducements for this overutilization was this crazy 
system where overreimbursements were provided for some of these 
infusion drugs?
    Mr. Grob. Again, we didn't tie analytically the two 
together, but the thing that concerns me is that it is in the 
air. I think where we want to be--I think we would all feel 
better if it just wasn't that big of a possibility.
    Chairman Tauzin. That is the point. Let me try to say it 
maybe a little more accurately, as you have tried to say it, 
Mr. Grob. The fact that these overpayments are there next to 
the fact that there is evidence not only in that study but in 
one reported by the New York Times on May 13, 2001 indicating 
how much overuse of chemotherapy seems to occur in some cases 
in the last stages of some cancer patients' lives when there is 
strong medical evidence that the chemotherapy had no effect at 
all upon the quality of life or the treatment of the cancer, 
that these studies standing out there with this overpayment 
system also present, if nothing else, creates the image that 
something is wrong and that is bad and the notion that anyone 
in this country would be given infusion drug therapies that 
would harm them or could possibly harm them or make life less 
pleasant for them in those last days with a system that 
overcompensates for doing that is a juxtaposition that we ought 
not to permit. Isn't that a point in your study?
    Mr. Grob. It is. We feel that we all wish you would not 
have to ask me that question.
    Chairman Tauzin. Exactly, and I am going to quote you. 
Abusive billing arrangements between the skilled nursing 
facilities and infusion suppliers resulted in tremendous 
profits, and here is your quote, ``which encouraged the 
overutilization of infusing services when no treatment was 
necessary.'' You did tie it together.
    Mr. Grob. Yes.
    Chairman Tauzin. Even if you hadn't, the juxtaposition of 
those two elements, overutilization where it could be harmful 
to patients and make their lives miserable in the last days and 
overpricing that could possibly encourage it is a situation we 
should not tolerate; is that correct, sir?
    Mr. Grob. That is right .
    I think the reason we could say that was in that case we 
found representatives, nurses from the infusion company, that 
were screening the nursing home patients as they came into the 
nursing home. So there was actually a presence there. So it 
went beyond mere speculation----
    Chairman Tauzin. Again, my apologies to any physician who 
thinks I may have slammed them. My mother is a three-time 
cancer survivor. I pray at the altar of this medicine that has 
saved my mother's life. So don't get me wrong. I love any 
doctor that I know takes his oath seriously and practices it. I 
defend my own profession, the legal profession, against slams 
whenever they come unfairly, but I don't defend unscrupulous 
lawyers, and I will not defend an unscrupulous system that puts 
people into this position or creates this image when it should 
not exist. So I hope that clarifies it a bit. The bottom line 
is we ought not create a system that even creates an image that 
anyone is providing infusion medical services to a patient in 
those kinds of conditions with any kind of connection to the 
fact that there is this availability of huge profits involved 
for doing it rather than the needs of that patient and the 
wonderful care and concern that almost every doctor I know 
provides to those patients, and I am talking about the fact 
that in every profession there could be a few bad apples and we 
ought not encourage them.
    Thank you, sir.
    Mr. Greenwood. I thank the gentleman, and the Chair 
recognizes for 5 minutes the gentlelady from California, Mrs. 
Capps.
    Mrs. Capps. I have to acknowledge I am struggling a bit to 
figure out how to pose it. I have two different things I would 
like to talk about, but I am curious, Mr. Bentley, you gave 
kind of an autobiography in a way, if you will, of your company 
in the beginning with the treatments that you provided and then 
blowing the whistle, if you will, or noticing the discrepancies 
that you did, and I am curious to know--you were squeezed out 
of--you opted out of certain partnerships or relationships that 
were offered to you. What is the status of Ven-A-Care now?
    Mr. Bentley. Right now we spend most of our time trying to 
educate and shine the light on what we feel that are abusive 
practices and abusive reimbursements so that we can hopefully 
have a level playing field some day and go back and do what we 
have always done.
    Mrs. Capps. So you are actually in this business of doing 
these studies or looking into these discrepancies pretty much 
full time now.
    Mr. Bentley. Pretty much full time, yes, ma'am.
    Mrs. Capps. If I could turn to Mr. Scanlon and/or Mr. Grob, 
I am sort of anticipating the testimony of the next panel 
because you have been doing a number of studies that point out 
what we are all sort of flabbergasted to hear today, to have 
discovered. To me, and I know all too personally that it isn't 
coincidental that this is the field of oncology where we have 
regulating agencies' reimbursement standards that are being set 
for a field where, because of the investments that the Congress 
has made in the National Institutes of Health and other 
research arenas, cancer treatments that were clinical trials 5 
years ago are standard today or even 2 years ago. That makes a 
challenge for a regulating agency to come up with pricing and 
all of the scheduling, and I would mention also that there have 
been some discussions about--that oncologists don't have any 
allowance within their offices for administering for the 
nursing care that goes into this as well and so some of the 
incentives for part of our problem come out of what I call the 
inability of our Medicare and Medicaid organizations to keep up 
with the changes, and I would like to have your comment on 
that.
    Mr. Scanlon. There is no issue that it is a real challenge 
to keep something as complicated as a physician fee schedule up 
to date because we all know that medicine is changing for the 
better and we would not want to have any kind of system 
discouraged. At the same time I think the changes are sometimes 
not as dramatic as they are portrayed and it is more of an 
evolution than a revolution, and we can keep data more current 
and keep our systems more in line.
    Now, in this regard, in terms of the physician fee 
schedule, the Congress stipulated that specialties could 
provide information, current information, to allow CMS and 
previously HCFA to update the fee schedule, and some 
specialties have. The oncologists have not. There are standards 
for the submission of this information in that the information 
has to be representative of the profession, it has to be 
information that is collected from a large enough sample to 
provide a reasonable basis to proceed forward. That is part of 
this and I mentioned we were doing another study to see how 
information can be updated.
    Another piece is the issue of how has the delivery of a 
service changed in terms of the nursing time, other staff time, 
supplies and other resources? That part needs to be 
continuously updated as well. There are some mechanisms in 
place. We will be looking at those to see how adequate they 
are.
    But let me go back to another issue you raised, which is 
that certain costs are not being recognized within the system. 
All costs in the data that are available to CMS were 
recognized. There was the one adjustment in terms of supply 
expenses but all nursing costs that were in the data that were 
available were recognized. It is a system that does compensate 
for some weaknesses by recognizing these costs and then trying 
to allocate all of these costs across the different procedures. 
So we have some faith in the system. We have some concerns 
about how one keeps the data to operate the system as timely as 
one needs, and that is what we are studying at this point.
    Mrs. Capps. Just one follow up if I have another minute. 
You are saying that the discipline of oncology, that those 
associations of doctors have not been forthcoming with data 
that you asked for?
    Mr. Scanlon. In terms of information that we have asked 
for, they have provided some of that. In terms of information 
they could have provided to CMS to allow their fees to be 
recalculated, they have not done so.
    Mr. Bentley. May I add to that question?
    Mrs. Capps. Please.
    Mr. Bentley. There is a drug that came off of patent, 
Taxol. It is a very important cancer drug. It has been on 
patent for approximately 5 years, originally derived from a 
California tree. So it is now being challenged by generic 
competition. So you would think the government would start 
saving some money because there is price competition, and this 
came across our fax, where this came across May 9, the first 
generic Taxol is introduced in the market, and they are already 
touting the spread, and the manufacturer came in with an AWP 
that was only slightly under Bristol-Myers Squibb's AWP; so the 
government is not benefiting nor are the patients nor Medicare 
or Medicaid from the fact that there is price competition 
occurring. And I question the fact that for 10 years Taxol was 
on patent and I don't think any oncologist was refusing to give 
Taxol to patients because there was no spread for those 10 
years. When Bristol-Myers Squibb made a representation about 
the price, that is what they sold it for. How did Bristol 
respond to the generic competition?
    Here is the next, where you see that Bristol-Myers' Taxol, 
they lowered their real price in order to meet the competition 
but they didn't report a lower price to the reporting services, 
and yet again yesterday I got another fax that now then there 
is a second generic that has come onto the marketplace and the 
prices have dropped about another 20 percent in the last 48 
hours but yet they put an AWP on their generic, exactly the 
same AWP that IVAX put on the first generic. So again Medicare 
and Medicaid and all the private insurers are not going to reap 
any benefit. And Taxol, the government currently spends, just 
Medicare, about $250 million a year on Taxol.
    Mrs. Capps. It is now standard treatment for breast cancer.
    Mr. Bentley. Correct.
    Mr. Greenwood. The Chair thanks the gentlelady and 
recognize the gentleman from Iowa, Mr. Ganske, for 5 minutes 
for inquiry.
    Mr. Ganske. Thank you, Mr. Chairman. The area of oncology 
is kind of a special one as it relates to drug expenses because 
what one person may say is medically necessary, another person 
may say isn't. Let me give you a real life example. You have a 
patient with lung cancer, it spreads to his chest, lymph nodes 
and to his neck, not a very good prognosis. The oncologist 
tells that patient, you know, we could put you on chemotherapy, 
you have a 30 percent chance of responding, and if you do, it 
may extend your life 2 or 3 months. Now, is that medically 
necessary or not? And in addition you may not feel very good 
for some of that time. You know, one person may say I don't 
think that is--I don't want to do that and another person may 
say those 2 or 3 extra months with my family may mean a great 
deal to me that I think is necessary. That is how difficult it 
is to make some of these determinations.
    That said, I think I want to thank this panel for being 
here; Mr. Bentley, you in particular for some of the data that 
you provided to us because I agree. I mean I agree with you, 
Mr. Grob, when you say the average wholesale price is a number 
that is misnamed. It is clear that we are not getting real 
numbers and so when you look at--I think this committee should 
look at the recommendations that you make. We co-authorize a 
commission to set payment rates. We could calculate a real 
rate. We could collect the invoices and do a real number if 
that is what we want to do. But I think there is a bigger 
question that this committee should look at, and that is do we 
want to continue in this way and what are the options? What are 
the options if the Federal Government is going to pay for these 
drugs? Well, we co-pay at cost. We could just pay what the 
invoice says. I mean does anyone want to do that? What are the 
controls on that? Then you can get any type of cost you want.
    Okay. We could pay at any true average. That is where you 
have had it in terms of your recommendations. Well, what do you 
do about then a large purchaser who is able to get a discount 
off that true average vis-a-vis a smaller purchaser who doesn't 
have that kind of leverage?
    And finally, you know, we could just set the prices and, 
quite frankly, I think if you chose the first option of paying 
at cost, that is exactly what the Federal Government would do 
because that is what it has done on every other aspect of 
Medicare. So I think that whenever we are looking at simply 
paying at cost or coming to a true average, we need to think 
about this big picture here as well. My personal preference at 
this time is we need to reform this, we need to get the actual 
numbers and then somehow take into account the fact that you 
can't ask certain smaller purchasers to actually take a loss if 
they cannot achieve the average, and I am not sure exactly how 
we do that.
    Mr. Bentley, do you have any comments?
    Mr. Bentley. Well, I would like to say that the prices that 
we have provided to the committee we think represent those that 
are available to an extremely small provider. Ven-A-Care 
virtually has no buying power, and yet there are much better 
prices for large purchasers and so what we are showing you is 
just the disparity that is occurring between the reimbursement 
prices and what a very small provider is very able to acquire 
these drugs for.
    Mr. Ganske. So do we throw out the AWP or actually make it 
into a real AWP?
    Mr. Bentley. There are a lot of drug companies that think 
AWP really means something and when they make a representation 
about their average wholesale price that is effectively what it 
is.
    Mr. Ganske. So for those who are playing the game honestly, 
it shouldn't affect them that much?
    Mr. Bentley. That is correct. And in fact I don't think you 
have physicians that are saying we are not going to prescribe 
or dispense Lilly drugs or Merck drugs because there is no 
financial incentive or inducement for us to provide those 
drugs. I am not aware of any evidence of that.
    Mr. Ganske. Mr. Scanlon, have you looked over the IG's 
recommendations? Do you have any preference in terms of this 
list of ways we could go?
    Mr. Scanlon. I think taking into account market prices, 
which is to recognize the average price being sold, is 
important. Whether it needs to be at the average or somewhat 
above, to recognize that there may be small purchasers who 
cannot obtain the average is the key. And we think that the 
data that CMS has available would allow us to look at that. We 
did look at small physician purchasers in terms of prices they 
could get and we did a survey of them and among the ones that 
responded and gave us prices, they all could get prices that 
were as good as the discounts that were reported, which are 
catalogue prices, and these catalogues are something that any 
physician can buy from.
    We talked about it as a starting point and the Inspector 
General has talked about it. If you are willing to use the 
catalogue and pay that price, you will get it. If you 
negotiate, if you can deliver some volume, you may get a much 
better price. I don't think we are in a position where we want 
to begrudge the providers that get better prices and say we 
have to find a way to get it down to the absolute minimum. We 
are more concerned about the system that is out of control at 
the other end--the price that is being paid by Medicare--which 
is so far and above the price that is actually being paid by 
even the provider getting it at the highest price.
    Mr. Ganske. Thank you, and thank you, Mr. Chairman.
    Mr. Greenwood. I thank the gentleman and recognize Mr. Burr 
for inquiry.
    Mr. Burr. Mr. Scanlon, is this something that we have just 
realized for the first time that Medicare pays too much for 
prescription drugs?
    Mr. Scanlon. As Mr. Grob indicated, the Inspector General 
has been looking at this for a long time and the conclusion has 
been the same.
    Mr. Burr. Why haven't we fixed it?
    Mr. Grob. We started it in the mid-eighties but we 
intensified our work a few years ago, in 1997, and we have 
issued updated studies every year since then.
    Mr. Burr. Why haven't we fixed it?
    Mr. Grob. I can't hear your question. I am sorry.
    Mr. Burr. Why have we not fixed it?
    Mr. Grob. There have been impediments, including a 
legislative impediment.
    Mr. Burr. It would actually require a legislative fix?
    Mr. Grob. I believe that would be better----
    Mr. Burr. Could HCFA have made changes in the past?
    Mr. Grob. CMS could have used its inherent reasonableness 
authority to do so. It could have obtained better data and made 
it available. It has tried to do that.
    Mr. Burr. Have you ever looked at any other area of 
Medicare reimbursements and found that people game the system?
    Mr. Grob. Yes.
    Mr. Burr. All areas? Some areas?
    Mr. Grob. Very many areas.
    Mr. Burr. As a matter of fact, we reacted to a number of 
them when we did BBA 1997----
    Mr. Grob. Exactly.
    Mr. Burr. Did we get them all right?
    Mr. Grob. We made a lot of them better.
    Mr. Burr. But we got some wrong?
    Mr. Grob. I don't know which ones you have in mind.
    Mr. Burr. Because in essence we try, like HCFA did, to 
calculate what a proper reimbursement is based upon the 
delivery of a product and that delivery can change based upon 
geographically where you are in the country, what the rental 
rate is. There are a lot of factors that come into play?
    Mr. Grob. Exactly.
    Mr. Burr. You from the standpoint of the Inspector 
General's office have come up with nine suggestions as to how 
we fix it. I will attempt to refocus everybody here on the 
solution because I think that everybody here is in agreement 
that we have a problem.
    Mr. Grob. Yes.
    Mr. Burr. That the average wholesale price is flawed, that 
we have lived with it for way too long, that we have not shown 
the backbone within the agencies that have jurisdiction over it 
that could have done it or within the halls of Congress where 
we could have legislatively fixed it. For whatever reason let 
us put that behind us and all agree it is wrong. You have come 
up with nine suggestions. Are there any of those that you would 
highlight more than the others?
    Mr. Grob. Yes. I like the idea of the commission, and that 
is why I put it first. Another one I think would be good would 
be to use the manufacturer's price that is used in connection 
with the Medicaid rebates as a source of data. I think it might 
be more helpful if I could give a few general principles that--
--
    Mr. Burr. Go right ahead.
    Mr. Grob. I would agree that I don't think we need to have 
the bottom amount. I think, as several have mentioned, there is 
room for some play here. I don't think we should base it on 
cost. What we have done basically with Medicare is move 
completely away from that. Hospital payments were based on cost 
and we had double digit inflation. And then there was Medicare 
physician payments, and we had very high inflation; so we went 
to a fee schedule. We have just gone to a fee schedule in the 
form of prospective payments for nursing homes, home health, 
and other types of facilities such as outpatient hospital 
costs. We have learned our lesson. If you go on cost, the 
actual cost an individual has occurred, you immediately come 
across two problems. One is looking over everyone's shoulder as 
they write every check wondering exactly what it is. And you 
can never keep up with it. And then if you actually could 
succeed, then no one would care what their costs were because 
they would get reimbursed for them, and that would drive the 
prices up.
    So cost based reimbursement has been the bane of Medicare 
since its existence and we have gradually corrected it in 
almost every area. So I wouldn't base it on the actual cost the 
person has incurred. I would substitute some kind of a Medicare 
payment rate which I think has to take into account primarily 
what the market is. We have to have some sense of what is going 
on out there in the market. That could be obtained from 
something like the actual manufacturer's price that, the data 
that is submitted for the Medicaid program.
    Those dollars are available. They can be audited. They need 
a little definition. You could do some market surveys, and I 
think that periodically, once a year or so, maybe more 
frequently, there can be a price set, and then that is the 
price. I would agree with what you are saying here. I don't 
think we look over a doctor's office and say you can never make 
a penny on every piece of gauze in your office. We know there 
is some give and take. I think people just don't want it to be 
very big or be a source of gaming and incentivizing.
    Those are some general principles. And out of that you 
could choose one or more of those options, none of which would 
be perfect, but they all would be better than what we have.
    Mr. Burr. Let me mention--Mr. Scanlon can comment on it and 
also Mr. Bentley--these highlighted solutions to fix an AWP.
    Mr. Scanlon. I concur with Mr. Grob, relying on the market. 
This is one of the few instances where Medicare may be able to 
rely on the market and what other purchasers are doing. 
Normally Medicare is such a dominant purchaser that to say we 
are going to pay what other purchasers pay would distort the 
market. But in the case of prescription drugs right now 
Medicare is paying for a very small share of them and they are 
easily defined commodities. So you are able to specify what you 
are getting and you are able to look to other purchasers and 
what their experience is. CMS has access to the information it 
needs. It doesn't just need an average price. It needs to know 
the circumstances under which buyers are getting different 
prices to be able to set a fee that is going to be adequate so 
that purchasers in different circumstances are able to buy 
drugs and supply them to Medicare patients.
    So using that information, which is market driven and 
therefore I think a reflection of the efficiencies of what a 
market can produce, is key here to setting market prices on a 
more rational basis.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes----
    Mr. Bentley. Could I just comment briefly?
    Mr. Greenwood. Yes, sir.
    Mr. Bentley. I would like to add that the hallmark of any 
change in reimbursement system has got to be some truth and 
honesty from the drug manufacturers because without that any 
system you go to is going to be doomed to fail, and I point to 
a number of Medicaid programs who do not use representations of 
AWP to formulate reimbursement decisions. They use wholesaler 
acquisition costs. California for 12 companies uses 
manufacturers' direct prices. There is also cases where in some 
States they are actually using invoices that are submitted by 
providers. So if you have manufacturers who are willing to make 
false statements about the wholesaler acquisition cost, about 
the direct prices they are selling it to, trumping up invoices 
so that provider submits an invoice for a thousand dollars when 
in 30 days they receive $500 worth of free goods and so they 
really paid $500, any system is doomed.
    Mr. Burr. Clearly I think the panel would agree, and I 
appreciate the Chair's indulgence, that we have the tools 
available to us to fix the average wholesale price. The 
question is do we have the willingness to fix the average 
wholesale price? No matter what we choose, whether it is option 
one or nine, we will still be susceptible to people who find a 
way to game the system; correct?
    Mr. Bentley. Absolutely.
    Mr. Burr. We will still need an Inspector General to help 
us on that.
    Mr. Bentley. There has to be consequences for those who 
choose to break the law.
    Mr. Burr. We can do better than what we have. I thank the 
Chair.
    Mr. Greenwood. The Chair thanks and recognizes Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman. I want to lead off 
with the comment that Mr. Burr mentioned that there has to be 
consequences. I wonder if the staff could put up on the screen 
document number F-2, which is dealing with Bayer Pharmaceutical 
Division. Let me say while we are trying to find it that this 
is an internal company e-mail that states--in talking about 
their competition, it is a an e-mail that says, ``Chris, if 
Baxter has increased their AWP, then we must do the same. Many 
of the whole care companies are paid based upon a discount from 
AWP. If we are lower than Baxter, then the return will be lower 
to the HHC. It is a very simple process to increase our AWP and 
can be done overnight. Let us talk about this at our meeting at 
Old Saybrook.''
    So there we have it pretty clear that Bayer Pharmaceutical 
Division in this case is working to increase the AWP not based 
upon scientific evidence but based simply upon trying to work 
out that they get paid more, they give the medical providers 
incentives, and of course it works out that the wholesaler gets 
paid more too. So everybody makes it and this continues to go 
forward.
    Let me ask the staff to put document number 7. This is a 
document from Baxter. I just read one from Bayer and now I 
would like to read one from Baxter, where they are talking 
about the AWP and they are saying ``This price is being 
promoted by certain manufacturers' sales forces as a financial 
incentive to use their product.''
    So here again we have Baxter Pharmaceutical as saying we 
have got to get on board here because people are using this as 
a financial incentive to use their product. They go on to say, 
``The deliberate manipulation of AWP or WAC prices is a problem 
that we need to address. The spread between acquisition costs 
and AWP/WAC is a direct profit for customers and is being used 
to increase product positioning in the market by certain 
manufacturers.''
    So I thank the staff for these documents and I obviously 
thank the staff for what they are doing here and you, Mr. 
Chairman, and the chairman from Florida, Mr. Bilirakis. But on 
a larger note, Mr. Burr touched upon the idea of what can be 
done. One of the things that can be done is to have the Justice 
Department enforce under the antitrust rules what has been 
accomplished simply in this memo.
    Now, this was not a big, big problem at Medicare until the 
nineties, but this has been going on for almost a decade. So in 
a larger sense Medicare, HCFA, has been a little bit asleep at 
the wheel because they don't necessarily--I mean I don't think 
you can blame Congress totally here because they could have 
done something like Medicaid is doing. Medicaid did something 
on their own to establish a new AWP system where the rebates 
will be based upon a more accurate model.
    So I think, you know, when you come to these hearings, and 
I have been to a lot of them and it is almost numbing to see 
these things, there is a lot of blame to go around, but I don't 
think Congress is totally at fault. I think HCFA should have 
done something about this in the early nineties, and obviously 
I think the Justice Department should have taken examples where 
Baxter and these other pharmaceutical companies were in 
collusion in trying to raise AWP without any reason other than 
to increase the spread for their medical providers to give them 
incentives.
    So I am always a little bit nonplused to sit here and we 
talk and talk and I say where is there someone that is going to 
take some action on this.
    Another question I have for you, Mr. Grob, you mentioned 
that we could save as much as a billion dollars a year if we 
stopped this.
    Mr. Grob. I believe at least a billion.
    Mr. Stearns. That goes to a larger question that President 
Bush has mentioned that he wants to reform Medicare to give 
pharmaceutical help to those who are poor who need this. So 
here the government is squandering a billion dollars a year and 
this could be going to beneficiaries who can't afford 
pharmaceutical drugs. So this is an area where this whole 
package of reform is what President Bush has talked about in 
the campaign and in the presidency. With a simple quick 
decision by HCFA to move to the Medicaid position on this, 
wouldn't that solve it immediately?
    Mr. Grob. The Medicaid program is complicated and has two 
features to it.
    Mr. Stearns. One of your recommendations--but instead of 
Congress sitting here and debating this thing, we go through 
the subcommittee and the full committee and the House, what can 
HCFA do tomorrow to make this so that we stop this?
    Mr. Grob. CMS would have its options limited to obtaining 
the most accurate market data it can find and making it 
available to the carriers in setting their prices and reducing 
them.
    Mr. Stearns. Well, couldn't they say every pharmaceutical 
has to give us your wholesale price, certify it, and if it is 
incorrect, you will go to jail? Is that----
    Mr. Grob. We basically have almost the equivalent of that 
in the Medicaid program, which is why I brought that up. 
Because of the rebate program the manufacturers are in fact 
required to submit that data, the manufacturing price we will 
call it, to the government, and that data is available. Now, if 
there were legislative authority to use it, that would probably 
be the quickest fix.
    Mr. Stearns. Okay. Mr. Scanlon, anything you would suggest?
    Mr. Scanlon. We believe very strongly that using the data 
that is available through the Medicaid rebate program would be 
the quickest vehicle in terms of trying to improve this pricing 
because it is data that details what manufacturers are selling 
drugs for under different circumstances. There are statutory 
requirements here and Medicare under the Balanced Budget Act 
must pay 95 percent of average wholesale prices. Whether that 
has to be this fictional price in terms of what is reported in 
the Red Book for some manufacturers or whether it can be actual 
average wholesale prices is another issue, and that is where I 
think reasonableness authority would be something that the 
agency could do.
    Mr. Stearns. I want to conclude my statement, if I can have 
additional 30 seconds in my conclusion here, Mr. Chairman.
    Mr. Greenwood. Without objection.
    Mr. Stearns. Mr. Bentley sent to Dr. Bruce Vladek a memo on 
June 12, 1997, in which he outlined all of this, and I would 
say, Mr. Bentley, there has got to be a place for you in the 
pearly gates up there and if you have any trouble after this 
hearing call us because we are with you 100 percent and 
appreciate what you have done. But I would say to the former 
Administrator what we have here from Bentley's memo here, which 
is part of the records I believe, shows that we have a scandal 
like we had with the $400 toilet seats in the military, we have 
the equivalent of that here in HCFA, and I think Mr. Bentley 
actually showed this photograph to the head of HCFA back in 
1997, saying, look, your legacy is going to be the $400 toilet 
seat, that this is going to apply to this whole problem dealing 
with AWP.
    Thank you, Mr. Chairman.
    Mr. Greenwood. Thank you, Mr. Stearns. Each of the members 
has had an opportunity to ask--except for Mr. Green from Texas, 
who joins us now and is recognized for 5 minutes to inquire.
    Mr. Green. Thank you, Mr. Chairman, and I appreciate the 
appearance of our witnesses simply because those of us who are 
moving in and out and representing Intercontinental Airport in 
Houston with Continental Airlines, obviously we have a much 
bigger issue, but I am glad this postponed hearing is taking 
place, and the issue I think is so important because of the 
criteria that, Mr. Grob, you talked about in your testimony, 
and in your testimony you referenced the considerable savings 
that the Medicare program can recognize if they utilize Federal 
Supply Schedule as the basis for prescription drug benefits or 
reimbursements. A number of us in Congress have been advocating 
this approach for years, not only for the few prescription 
drugs we provide for under Medicare but for prescription drugs 
for seniors as a whole.
    Now I know in this issue seniors may pay more for their 20 
percent co-pay based on this pricing aberration, but generally 
overall would you say that the high cost by using the Federal 
Supply Schedule would benefit not only the issue we are here 
today about but also seniors in general who may not have a 
prescription plan as part of Medicare?
    Mr. Grob. On the surface it would certainly seem to provide 
a lower cost for the beneficiaries. But I would really have to 
say that that really is beyond the scope of other studies that 
were done because there would be other ramifications concerning 
the market, and so I would say on the surface it would have 
that effect, but what the other effects are we haven't studied.
    Mr. Green. I understand. I was looking at your statement. 
Again I think we have made that issue here in the committee a 
number of times and just by using the Federal Supply Schedule 
we cannot only save the Federal Government maybe a billion 
dollars under Medicare but how many billions do you think we 
can save the average senior citizen who----
    Mr. Grob. If you were to use the Federal Supply Schedule 
amounts for the drugs that we looked at, you would save almost 
$400 million a year for the beneficiaries.
    Mr. Green. That is just on the oncology----
    Mr. Grob. No. We looked at 24 drugs and I think it was 
about $350 million or more of savings for the co-payment for 
Medicare beneficiaries for the 24 top selling drugs in 
Medicare, top drugs. That included inhalation drugs.
    Mr. Green. That is for the co-payment for those 24 drugs?
    Mr. Grob. Exactly.
    Mr. Green. I know neither of us can extrapolate too well 
but if we would provide that to the gamut of pharmaceuticals 
that seniors have to pay that is not subject to a co-pay, they 
just--if they are under regular Medicare, they go down and buy 
their prescription from their doctor, and the Federal Supply 
Schedule is much less than what I may go down to buy at my 
pharmacist or my sister or mother or father may do.
    Mr. Grob. Exactly.
    Mr. Green. Mr. Scanlon, you admit in your testimony that 
the oncologists are often underpaid by as much as 15 percent, 
and you stated that if we modified the practice expense 
payments on college practices it could increase their 
reimbursement by 8 percent, or $31 million. You also reference 
a modification of the formula used to calculate supply 
expenses, which would increase oncology practice expenses by 
about $20 million. I understand that the Medicare statute 
requires that any changes to the practice expenses for one 
specialty be budget neutral, therefore if we increase oncology 
payments we would have to cut payments from another specialty, 
and I guess that is--I know I followed my chairman a little 
bit. If we are going to save maybe upwards to a billion dollars 
in Medicare and we should reimburse oncologists 15 percent, can 
that come out of savings or are we going to have to take it 
from cardiologists or other reimbursements?
    Mr. Scanlon. It is your decision whether or not you want to 
add to the pool of dollars that are being paid physicians and 
whether it is going to come out of the savings. One of the 
important things to remember here is that the budget neutrality 
principle was applied at the very beginning, so therefore when 
the oncology fees were calculated, and they are $51 million 
less than what they would have been if a different method would 
have been used, and that $51 million was then spent on other 
specialty services. And some of that $51 million was also 
earned by oncologists because some of their physician services 
had higher fees associated with it, and the $51 million in 
terms of the overall physician fee schedule is about two-tenths 
of 1 percent. So we are talking about a redistribution of a 
very small amount of money.
    Mr. Green. But your testimony is we wouldn't necessarily by 
increasing oncology have to decrease other specialties?
    Mr. Scanlon. No.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Greenwood. Each of the members has had a round of 
questioning. There are a couple more points that need to be 
made. So we are going to go through a second round for those 
who want to. It is not mandatory.
    The Chair recognizes himself for 5 minutes and would ask 
the staff to bring up chart P-1. I want to go to the question 
of utilization because we have talked about the way in which 
savings could rendered to the Medicare program and overpayments 
were made just based on normal levels of utilization, but I 
want to look at ways in which the spread and the false AWP 
payments can affect utilization, and let us look at this 
product here, which is ipatropium bromide, which I believe is a 
therapy for emphysema, and similar pulmonary diseases.
    In 1995, when there was no spread on the drug, Medicare 
paid a little more than $14 million in that year. As you can 
see, as each year passes and the spread becomes larger, 
utilization skyrockets. Today, 6 years later, Medicare pays 
more than $347 million, over a third of a billion dollars, for 
this drug alone.
    Mr. Bentley, I am going to ask you if you could further 
illuminate this issue.
    Mr. Bentley. Yes, sir. This is an interesting drug because 
prior to 1995 it was a patented drug with no generic 
competition and here again, like the Taxol example, once 
generics came into the marketplace the prices started dropping 
precipitously; that is, the prices to the providers. However, 
the government, both Medicare and Medicaid, has not achieved 
any savings due to price competition and in all likelihood it 
is kind of a double whammy because we believe a lot of this 
utilization is directly attributable to the spread.
    A case in point, recently Texas, their Medicaid program, 
based on some information Ven-A-Care provided for another 
inhalation drug, albuterol sulphate, where there was a rather 
large spread----
    Mr. Greenwood. Perhaps the staff can bring up document P-2.
    Mr. Bentley. [continuing] cut its Medicaid reimbursement in 
Texas. Now, they were cutting their reimbursement, so that 
would affect access to care. I can tell you this. They reduced 
the prices dramatically that they reimburse under the Texas 
Medicaid program to the real prices in the marketplace. They 
have not experienced any access to care issues, and I heard 
yesterday from an Assistant Attorney General in Texas that not 
only are they achieving the savings by the reduction in the 
prices, they have also started achieving about a 20 percent 
reduction in the utilization.
    Mr. Greenwood. Mr. Scanlon and Mr. Grob, do you care to 
offer any comments in this regard?
    Mr. Grob. We have done additional work on nebulizer drugs, 
looking at the utilization of those, and based on 1994 data we 
found about $30 million of the nebulizer drugs that were used 
were drugs that should never be used in combination. We also 
found instances of amounts that differed from prescriptions. We 
also had amounts that varied from the Medicare guidelines for 
these drugs. So we did find improper utilization and 
inappropriate utilization of these nebulizer drugs when we 
looked at them. This is primarily albuterol.
    Mr. Scanlon. Mr. Chairman, we haven't studied this beyond 
the issue of pricing, and the pricing gap is the same that we 
observed, and I would note this is the kind of disturbing 
pattern that we have been talking about, increased utilization 
as the spread increases, and I would also note that there is 
some very aggressive advertising of these inhalation drugs.
    Mr. Greenwood. Your study, the GAO study that showed 
roughly built-in savings that we could achieve only assumed the 
same utilization and it did not, as I understand it, 
acknowledge savings from more of a dynamic scoring, if you 
will, that would occur if the spread was not in fact driving 
utilization. So when given these two charts where we have seen 
how change in the spread dramatically affects utilization, 
would it be fair to assume that a billion dollars is a 
conservative number because without the incentives driven by 
the spread we would probably see a change in utilization? Is 
that a fair statement?
    Mr. Scanlon. I believe that is a fair statement. We hope it 
would be a change in utilization driven by overutilization 
declining as opposed to genuine access changes as well.
    Mr. Greenwood. The Chair yields back the back his time and 
yields 5 minutes to the gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. You have a very insightful panel in so many 
ways, and hopefully it is our commitment to follow up on this. 
I want to focus on something we have talked about a little bit, 
and that is what can HCFA do and Medicare do without 
legislative action? The GAO issue today was in response to a 
Congressional mandate to do a comprehensive report on drug 
pricing before the Centers of Medicare and Medicaid Services be 
allowed to change the payment structure for Medicaid drugs. Now 
that the study has been done and we have shown that the average 
wholesale price is flawed, it would seem as if the CMS should 
be able to go forward and use the catalogue pricing data 
obtained by the Justice Department as the basis for drug 
disbursement. Would you agree with that? Is that possible at 
this point in time?
    Mr. Scanlon. I think it's preferable to use the information 
that's available through the Medicaid rebate program, in 
combination with the wholesale catalog discount----
    Mr. Deutsch. Right. I guess the question, though, 
specifically is, can they do it now without legislative action?
    Mr. Scanlon. They can do it without legislative action. As 
Mr. Grob indicated earlier, they would do it through the 
inherent reasonableness process, which is more cumbersome and 
over the years has resulted in very few changes in prices.
    Now, you did give them expedited authority in the Balanced 
Budget Act to make modest reductions on an annual basis of 15 
percent in prices. So that would be immediately accessible.
    But we're talking about bigger changes here for a number of 
drugs, and that would take the more elaborate process. 
Obviously, if you provide them further statutory authority, 
it's going to expedite things even more.
    Mr. Deutsch. Right. I guess I would just follow up, though. 
I mean, knowing the legislative process as well as you do, 
it's--you know, one of the reasons we delegate issues like this 
is administratively it's just a lot easier, especially, you 
know, in hearings like this when we're clear of what the 
situation is in the world.
    Mr. Grob, did you want to respond?
    Mr. Grob. I would hope that you would consider legislative 
action. Our experience has been that for the use of the 
inherent reasonableness approach that, actually, that has not 
been a lot easier than the legislative process. For some of the 
reductions that have been made, for example, for Oxygen, an 
initial attempt was made to use the inherent reasonableness, 
but it ended up getting made by the Congress, and that was done 
pretty effectively and fairly timely. Your point is that every 
means should be used and to the extent that there are 
administrative means those should be used right away. But I 
think the system is so flawed that we need a brand new system.
    Mr. Deutsch. Well, let me throw it back. As far as you're 
aware in either HCFA or in HHS directly, I mean, is this 
something that the policymaker level--has this been presented 
to policymakers as an option for them to implement these 
changes administratively?
    Mr. Grob. Okay. Sir----
    Mr. Deutsch. What is the official, you know, sort of 
response to that?
    Mr. Grob. Well, you'll have to follow up with Mr. Scully on 
this administration, but certainly our reports have been public 
and have always been written to the administrator of HCFA, now 
CMS. So they've always been in the mill, and there have, in 
fact, been, as I've said, some legislative proposals from the 
prior administration. So I think it's been on the table.
    I think the value of this hearing is the dramatizing and 
the clarification. I think the subject takes intense study, and 
the work that went into this hearing has provided that, so that 
the insights are a lot clearer to more people now.
    Mr. Bentley. If I could add, I believe the problem could be 
remedied tomorrow if the drug companies that are the culprits 
who are reporting these false prices contacted first Data bank 
and Red Book and submitted new prices, honest prices. And I 
point to the fact that approximately 90 days ago Abbott 
laboratories did that for Medicaid purposes, and there were a 
number of very important drugs where they made 
representations--I'll point to Vancomycin, one gram as an 
example--where they were representing the average wholesale 
price of being around $56 per gram. They were really selling it 
for less than $10.
    Now, then, for Medicaid purposes, they initiated a new 
pricing to, First Databank where they repriced some 200 or 300 
drugs with fairly honest representations. The State Medicaid 
programs across the United States started generating the 
savings immediately from Abbott's representations and from 
their actions.
    So all we need is for these companies--maybe the hearing 
will be the impetus for them to have a change of heart and 
report new prices. CMS doesn't have to do anything. Congress 
doesn't have to do anything.
    Mr. Deutsch. Let me follow up. Mr. Grob, what about that as 
a solution administratively? Could you or through--actually 
through--could HCFA change the definition of the average 
wholesale price and then just define it in a different way to--
in such a way that would basically be the average wholesale 
price, for that matter?
    Mr. Grob. I think the law says ``average wholesale price,'' 
and I don't even believe that that phrase uses capital letters. 
I think the people who voted for that law, everyone who cast a 
vote for that law, probably thought it meant the ``average 
wholesale price.'' So certainly CMS would have it in its 
authority to define that ``average wholesale price'' to mean 
what the English phrase means. And I think then if they could 
get the data to back that up, use data that's available, then 
in fact it could be done. And I do agree with what's been said 
here by Mr. Bentley about the publication of the data.
    Now, these companies have had that option for many years. 
So I hope they do--I hope they do do it very soon.
    Mr. Greenwood. The Chair thanks the gentleman from Florida.
    Mr. Tauzin.
    Chairman Tauzin. Thank you very much, Mr. Chairman.
    Let me mention a solution that didn't work, so we don't do 
that one again, the Balanced Budget Act. We said we'd reimburse 
the average wholesale price minus 5 percent, and we all went, 
we'll be danged; we saved a lot of money. And the average 
wholesale price jumped 10 percent the next year. We didn't only 
not save money; we lost money. That was a non-solution.
    A number of members have talked about the effect of this 
system on the Medicaid programs of America. In the Medicare 
program, we're talking about drugs generally that are used in 
three areas, right, and chemotherapy oncology-type drugs, 
inhalants and some other specialties like urology. In the 
Medicaid system, it's wide open, isn't it?
    Mr. Grob. Yes.
    Chairman Tauzin. We're talking about all drugs.
    Mr. Grob. That's correct.
    Chairman Tauzin. In fact, Mr. Bentley, you brought a chart 
for a number of my colleague a few months ago. It's document S-
2. I'd like to put it up. It's involving the drug Cefadroxil. 
And I want to look at the Louisiana Medicaid effect. This 
Cefadroxil--the chart indicates what the spread looks like on 
this drug in Louisiana, Pennsylvania, Florida, Michigan, Texas 
and Ohio. Texas and Ohio have apparently done a lot of work, 
yet the spread is down. They've got the spread, the difference 
that the State Medicaid program is paying out as opposed to the 
real price of the drug.
    Mr. Bentley. Yes, sir.
    Chairman Tauzin. They've got it down to $16 and $35. But in 
Louisiana the spread on this drug, which costs Medicare $82, 
because of a Medicaid reimbursement of $274.50, is $191. The 
spread, the extra money made by the system to the provider, is 
more than twice as high as the--the spread, the additional 
profit, is more than twice as high as the cost to Ven-A-Care. 
Is that correct?
    Mr. Bentley. Yes, sir.
    Chairman Tauzin. Let me turn to--anybody have any idea what 
this system is costing the Medicaid systems of America?
    Mr. Grob. Yes. They spend about $16 billion a year, and the 
last time we studied it recently looking at the brand name 
drugs, we calculated a loss of about a billion dollars for the 
brand names. Now, we're working on the generic drugs right now, 
hoping to have a report----
    Chairman Tauzin. So we're talking not just about the 
billion in savings to Medicare. We're talking about billions in 
cost to the Medicaid systems of America----
    Mr. Grob. Exactly.
    Chairman Tauzin [continuing]. Which is trying to provide 
medicine for the poorest of our Nation.
    Mr. Grob. Exactly.
    Mr. Greenwood. Would the gentleman yield for a second?
    Chairman Tauzin. Yes, I'll be glad to yield.
    Mr. Greenwood. So, on average, since the Federal Government 
pays 50 percent of the cost of Medicaid drugs, would you argue 
that, if we changed the system, that there's a potential to 
save minimally now a billion and a half dollars to the Federal 
Government. Is that a fair statement?
    Mr. Grob. I'm sorry. I didn't quite follow.
    Mr. Greenwood. Given that the Federal Government is 
paying--reimbursing the State Medicaid programs for, on 
average, 50 percent of the price, if they're squandering at 
least a billion dollars additional----
    Chairman Tauzin. The chairman is making the point that any 
dollars we save to the Medicaid system, 50 percent is a Federal 
saving. Right?
    Mr. Grob. I'm not sure whether the billion is the total of 
Federal and State or only the Federal part.
    Chairman Tauzin. And it may be much more than a billion.
    Mr. Grob. As I said, we've only done the brand names----
    Chairman Tauzin. Let us look at examples of excessive 
reimbursements with pharmaceuticals by the Louisiana Medicaid 
Pharmacy Program, one I'm very interested in. If we can put--
that chart is up now. And we can look at one drug--Elkins-
Sinn's drug called Leucovorin again. The lowest price according 
to this report, Mr. Bentley, that you've seen in the 
marketplace, the real price, is $2.39.
    Mr. Bentley. We actually prepared this chart a couple of 
years ago, and that is why there is the discrepancy between the 
Leucovorin here of $2.30 and I believe our other chart where it 
was $1.25. Leucovorin has actually gone down in price, yes, 
sir.
    Chairman Tauzin. But the average Medicare price is $21.70. 
The Louisiana Medicaid reimbursement is $50.34.
    Mr. Bentley. Twice what Medicare was----
    Chairman Tauzin. Twice what Medicare is reimbursing. And, 
what, 30 times the price of the drug in the marketplace today 
or more? That's amazing.
    And you go down the list. I mean, you see another one that 
stands out again, Vancomycin, a price then of 3.45. I don't 
know what it is today. Medicare was reimbursing it at $9.44. 
Louisiana reimburses at $30.43. How on earth are we going to 
keep our Medicare programs alive if they're being drained at 
that kind of rate?
    Mr. Bentley. That's correct.
    Chairman Tauzin. In fact, I've got a quote from the Wall 
Street Journal about the program in Missouri where they're 
saying they've got the biggest core cuts in their Medicaid 
program in history, and it's going to affect the amount they 
can spend on education and other vital State needs because it's 
driving the cost of the Medicaid system into near bankruptcy.
    Mr. Ganske. Would the gentleman yield?
    Chairman Tauzin. I'll be glad to yield to my friend.
    Mr. Ganske. Well, Mr. Chairman, we've all in the past been 
rather amazed at how cagey those Cajuns down there in Louisiana 
are on the Medicaid program, but I wondered if we could----
    Chairman Tauzin. Well, I don't believe I want to yield to 
the gentleman if he's going to insult my Cajun but----
    Mr. Ganske. I want to tie this, though, to the point that 
Mr. Grob made in No. 2, in how, Mr. Grob, you suggested that 
maybe we ought to look at--in fixing AWP, we ought to look at 
what Medicaid has done.
    Chairman Tauzin. That's part of my point. That's the last 
place we ought to go for advice is what I'm trying to point 
out.
    Mr. Ganske. Well, maybe that's not the case, because maybe 
Louisiana is an exception over what has gone on with AWP.
    Mr. Grob. Can I make an important distinction?
    Chairman Tauzin. Yes, please do.
    Mr. Grob. The Medicaid program achieves savings in two 
different ways. One of them is that they get discounts off of 
AWP the same way Medicare does, except they generally get more 
generous discounts. Now, that's not what I was talking about. 
There's another part about Medicaid, which is the rebate 
program, where the manufacturers must return money to the 
Medicaid in light of the expenditures made, and that is the 
part I was talking about.
    Chairman Tauzin. That can be instructive. I agree with 
that. But the point I'm making is that the Medicaid 
reimbursement is still worse than the Medicare. That's the last 
place you want to go for advice on how to set an average 
wholesale price for the Medicare program.
    And I want to point out something else, too, and that is 
that if we're going to correct this the obvious place to look 
for the real numbers is in the real marketplace with the 
numbers, Mr. Bentley, you provide for us--you've been providing 
for us as to what Ven-A-Care can really buy these drugs for. I 
mean, we're talking about reimbursing two categories of 
services: one, the service, the practice; and the other, the 
drugs that are used. In both cases we ought to look at the real 
marketplace, what is the private sector costing these two 
systems. And the government ought to reimburse close to those 
numbers.
    If we don't--if we are reimbursing $50 for a drug that 
costs a dollar and a quarter, you were telling me, Mr. Bentley, 
what are we, just insane? And are we going to drive these 
programs to the point where they can't provide the services 
they were intended to provide for citizens of this country? We 
entitle this effort. I want you all to know it.
    I think Mr. Burr came up with the title to this whole 
effort we're trying to undertake in reforming Medicare and this 
whole pricing system and getting more drug coverage for more 
Americans. We called it Patients First. Patients are last in 
this program. They're getting killed.
    Mr. Scanlon. Mr. Chairman, I just wanted to note that what 
we are talking about here is trying to use private sector 
transactions and information to try and set Medicare prices on 
a more rational basis. The Medicaid program at the Federal 
level has the requirement that manufacturers turn over to CMS 
information on private transactions with genuine net prices, 
not the types of catalog prices that we've been talking about--
--
    Chairman Tauzin. Well, tell me about Texas. Texas has been 
trying to do that, hasn't it? Mr. Bentley, aren't you involved 
in that? Aren't you involved somehow, and isn't Texas going 
through hellacious problems? And they're probably leading the 
country in trying to get this straightened out.
    Mr. Bentley. That's correct. Texas does not rely on prices 
that are submitted to either of the publication services, Red 
Book or First Data bank. They actually go to a certification 
form, and that's sent directly to the manufacturer.
    Chairman Tauzin. They're ahead of the rest of the States, 
and they're having a heck of time, aren't they?
    Mr. Bentley. That's correct. And also, unfortunately, when 
a manufacturer makes false representations about their prices, 
the Federal rebate program is not making the States whole for 
the difference. So they are not--the Congressional intent, as I 
have read it, of OBRA 1990, which was the State Medicaid rebate 
program, was to give the State Medicaid programs the benefit of 
the manufacturers' best prices. But if you start out with false 
prices, even though they're giving a rebate back to the States, 
the States are not anywhere close to being at the 
manufacturers----
    Chairman Tauzin. They're taking a lot more than they're 
giving back. Is that right?
    Mr. Bentley. That's correct. Yes, sir.
    Mr. Grob. One last clarification. What I was referring to 
in using the Medicaid program is that there is a very rich 
source of data that the manufacturers must submit to CMS, not 
to the States, which is their actual manufacturers' prices, 
taking into account the discounts that have been offered that 
are maintained confidentially by CMS but that are used by them. 
That source of data, which is auditable, is already available. 
It's submitted every year, and it reflects the actual prices 
that the manufacturers are charging for the retail sale of 
drugs. All I was saying is that that data could be used as a 
basis----
    Chairman Tauzin. I agree with you. I'm not arguing that. I 
think you're correct. I think there's a good wealth of data 
there.
    My time is up. I just want to make the point again, 
everything we do to correct this problem--and I love the way 
Mr. Burr focused on that, on the different solutions you come 
up with, because that's really what we've got to get to. In 
every way we correct that problem, we're not only going to save 
the Medicare program this billion dollars; we're going to save 
the Medicaid programs of the States possibly their life, their 
function, their capacity to do their job. And 50 percent of 
those savings will be inured back to the Federal Government, 
because we have a 50 percent responsibility in those State 
programs. I mean, this is very well worth doing, and you're 
helping us, I think, see our way to it.
    Thank you very much.
    Mr. Greenwood. The time of gentleman has expired.
    Does the gentleman from New Jersey, Mr. Pallone, seek 
recognition? The gentleman is recognized for 5 minutes.
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask Mr. Bentley to comment on some documents. I 
have a series of documents that were obtained by the committee 
from Glaxo that detail at least part of their marketing 
strategy around the Zofran market. And we have those. Okay. I'd 
like to read, Mr. Bentley, parts of several documents and ask 
for your comments and ask, Mr. Chairman, that the documents in 
their entirety be placed into the record if they haven't been 
already.
    Mr. Greenwood. I believe they have been, but without 
objection, they certainly will be.
    Mr. Pallone. Thank you.
    The first is a memo dated January 31, 1994 in which this--
do we have it up there, or should I wait a minute? Oh, it isn't 
part of that. Okay. All right then. I'm going to have to read 
this, Mr. Chairman.
    The first is a memo dated January 31, 1994, in which this 
bullet point appears: Telemarketers who could sell the 
reimbursement issues with Zofran: Example, because of the 
contract price on Zofran, there is almost a 20 percent spread 
between doctors' acquisition costs and AWP. With the price of 
Zofran being most likely higher than Kytril, it will be to the 
physicians' best interest to continue to use Zofran.
    As you can see, Zofran will mean more profit for the 
physician. Oncologists seem to be more business-oriented than 
most physicians. This will be an excellent selling point.
    Did you want to comment on that?
    Mr. Bentley. That's correct. Unfortunately, a lot of 
manufacturers' representatives are going out and marketing 
their respective drugs not based on the efficacy of the drug 
but what in fact will put the most money in either the 
physician's pocket or the pharmacy's pocket, and so you have a 
case where there's marketing actually going on to encourage the 
utilization of one drug over a competing drug by using 
government funds that fund the kickback as a marketing 
mechanism.
    Mr. Pallone. And how common is this kind of telemarketing?
    Mr. Bentley. It is very common.
    Mr. Pallone. Okay. Well, the second----
    Mr. Bentley. Especially with the drugs that are at the 
focus of this committee's interest. I guarantee you that their 
sales representatives are out pounding their beats every time 
they've raised an AWP or they've lowered a price. Just like 
those Taxol examples, they get faxes out immediately, followed 
by telephone calls that, hey, our price has gone down in the 
market. Buy my drug over my competitor's drug.
    Mr. Pallone. Okay. Thank you.
    And then, Mr. Bentley, another of these documents dated 
October 15, 1997, was developed in anticipation that a third 
drug, Anzemet, will enter this market. And if I could read a 
section there for you to comment on.
    It says, the package insert includes a warning concerning 
cardiovascular side effects and describes one episode of 
complete heart block and one death. A bolded precaution 
supports the warning.
    Now, you're familiar with the actual competition in the 
marketplace between these three drugs that I've mentioned. 
Would you say that side effects such as the apparent FDA 
concern about Anzemet play a prominent role in physician choice 
of drugs?
    Mr. Bentley. I would think that that would be a 
consideration, absolutely.
    Mr. Pallone. But, you know, they're still competing with 
regard to price.
    Mr. Bentley. That's right.
    Mr. Pallone. I just--you know, it's amazing to me when I 
see, you know, some of the things that the committee has 
uncovered. And, again, I want to thank you for all that you've 
done. I appreciate it. Thanks.
    Mr. Greenwood. The gentleman yields back the balance of his 
time.
    Does the gentleman from Texas seek recognition?
    Mr. Green. Thank you, Mr. Chairman. I have just another 
series of questions for Mr. Bentley.
    Mr. Bentley, you provided us with such an unprecedented 
view of the world of drug pricing, and it's not obviously a 
pretty one to those of us--who do you blame for this scheme, 
the drug companies or the providers or maybe those of us who 
passed the Balanced Budget Act in 1997 or 1996?
    Mr. Bentley. I think there's enough blame that can go 
around for everyone. Certainly, you know, right now, as I've 
said, the manufacturers that are causing these inflated prices, 
they have it within their power to make the price changes 
immediately so that the programs can start achieving these 
savings that are very much needed. I don't know, other than 
their motives for profits, why they're not doing that.
    Mr. Green. That's why people rob banks, too, their motive 
for profit. But later this morning we're going to hear from the 
American Association for Home Care, which is what your company 
did. You're a home health care company?
    Mr. Bentley. Yes, sir.
    Mr. Green. This witness will say that the infusion 
companies cannot make money if they don't get the inflated AWP. 
Is that true of your company?
    Mr. Bentley. Well, I can't say that was absolutely true, 
because our company was merely a pharmacy. We worked in 
conjunction with home health and nursing agencies who actually 
went out and administered the drugs. And I will tell you this, 
that in Florida nursing agencies are paid separately for those 
services. So if there is an issue that a company is not able to 
hear, again like the oncologists get enough money on the 
professional side, I think that is a totally different issue 
than whether there are false prices being reported on 
pharmaceuticals.
    Mr. Green. Did any of the groups, whether infusion 
companies or doctor/providers--did any of these groups go to 
the drug companies? Have you had any evidence that they asked 
for increases in the AWP so that they could survive or that--
something that was already readily available?
    Mr. Bentley. Absolutely. There's evidence in the 
committee's possession. There's a Baxter internal memorandum 
where they admit that raising their AWPs was a large part of 
their negotiations with two large national home health care 
companies. We're looking for it now.
    Mr. Green. Okay. And that was already--that's in the 
documents?
    Mr. Bentley. Yes, sir.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Bentley. Here it is here. Increasing AWPs was a large 
part of our negotiation with the large home care companies. 
And, in fact, there's other documents in the committee's 
possession where there are providers and GPOs that actually go 
to the manufacturers and say, we're going to buy your drugs, 
our members will buy your drugs, and the basis is going to be 
on the greatest spread, and so we're telling you up front that 
is going to be the prerequisite as to whether we're going to 
buy your company's drugs or not. If you have the biggest 
spread, we'll buy yours over your competitor's.
    Mr. Green. Mr. Chairman, do we have a copy of that memo 
that was just up? Is that available?
    Mr. Bentley. Here it is here. H, low price and best 
spreads. Contract pricing will be evaluated on lowest price 
and/or best spread between AWP and the contract price for 
multisource products.
    This was a GPO document. However, it was in the possession 
of a drug manufacturer who turned it over pursuant to the OIG 
subpoena.
    Mr. Green. I'd like to see the whole document. I guess that 
is my concern, because I see quoted, and you said it was from 
Baxter?
    Mr. Bentley. No, sir. This particular document was from 
Gerimed, which is a large group purchasing organization. But it 
was presented--or it was produced under an OIG subpoena, so I'm 
not sure which pharmaceutical company, one of the 
pharmaceutical companies.
    Mr. Green. So your testimony is that----
    Mr. Greenwood. Mr. Green, would you yield for a moment?
    Mr. Green. Sure.
    Mr. Greenwood. Would you identify the document in your 
hand?
    Mr. Green. I was just looking for something that was 
reflective of this.
    Mr. Greenwood. Did you give us the document number?
    Mr. Green. Mr. Bentley must have that.
    Mr. Bentley. It's probably in this book. I just don't have 
the tab.
    Mr. Lockwood. It's under O. Either 5 or 6.
    Mr. Bentley. It's 05. It was produced by Dey Laboratories.
    Mr. Green. So this information is that some of the 
providers obviously also worked with the manufacturers to game 
the system?
    Mr. Bentley. I believe that Dey had this in their 
possession, because Gerimed had told Dey Laboratories that in 
order for Gerimed to consider whether their members would 
purchase Dey's products, they wanted Dey to know right up front 
that one of the requisites was going to be who was going to 
provide the biggest spread on their drugs.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Greenwood. The time of the gentleman has expired.
    Does the gentleman from Iowa, Mr. Ganske, seek recognition?
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Greenwood. The gentleman is recognized for 5 minutes.
    Mr. Ganske. Mr. Grob, I want to go over your 
recommendations in a little bit more detail. No. 1 says that we 
could look at authorizing a commission similar to MedPAC to set 
payment rates. Quote, it would then be granted authority to 
require manufacturers to provide them with drug wholesale 
prices.
    Then on No. 2, you say we could calculate the national 
estimated acquisition costs based on average manufacturer 
prices, AMP, which you already testified some on, but you go on 
to say, we believe an initial intensive effort should be made 
to audit AMP data reported by manufacturers to validate its 
accuracy.
    Mr. Grob. Yes.
    Mr. Ganske. No. 4 says, or we could increase discounting of 
the published AWP.
    The point that I'm getting at is that--or even on No. 6, we 
could establish manufacturers' rebates similar to those used in 
the Medicaid. It would minimize manufacturers' incentives to 
inflate AWP.
    But, anyway, the point I want to get at is we have to have 
accurate data.
    Mr. Grob. Exactly.
    Mr. Ganske. Now, you mentioned a little while ago that CMS 
has data. How accurate do you think that is?
    Mr. Grob. They don't have very much. They have some data 
that has resulted from some work with the Justice Department on 
a number of drugs that they were able to make available to the 
carriers earlier. That data is available--some efforts have 
been made, I think, as Mr. Bentley mentioned, to get some of 
the drug companies to produce more accurate prices in their 
public documents, but systematically the best source of data 
today is that average manufacturers' price, the actual 
manufacturers' price, which is submitted to CMS every year to 
be used in conjunction with the Medicaid program. That is the 
best data that is generally available and is updated, you 
know----
    Mr. Ganske. Well, how do you know that that's accurate?
    Mr. Grob. We know that it's not completely accurate. That's 
why we said that would have to be audited. I don't know what 
data we could trust right now, except that with that data there 
already is a statutory requirement for it to be submitted to 
the Department. So there is an obligation for it to be done 
right.
    If the manufacturers don't tell the truth there, then they 
have submitted false data. And the data then--it does come in 
regularly. So it is much more susceptible to definitions and 
audits than any other source, which comes from a variety of 
different sources and doesn't come so regularly. It's the best 
set that you could work with right now.
    Mr. Ganske. It seems to me that, you know--if you use that 
set or whatever, you're going to have to use actual--you're 
going to have to use actual invoices at some point to cross-
check.
    Mr. Grob. I think that that idea of the commission sort of 
encompasses that kind of thinking, that basically you would--I 
think you need a baseline of data, and then, if you want to, 
you can use sampling or other means in order to make sure it 
sounds realistic and that it really does reflect things.
    What I was talking about earlier--and I wasn't meaning to 
respond specifically to another comment that you made--I don't 
think you'd want to do that for each and every payment that 
each and every physician makes each and every time. I think 
that would be overwhelming. But I do think that your point is a 
good one that trying to get some real live market data, at 
least on a sampling basis, in order to see if what you have is 
real I think is a good idea.
    Mr. Ganske. I'm very interested in this. Because as 
Congress looks at providing increased prescription drug 
coverage for Medicare, one of my ideas has been that we utilize 
the State Medicaid drug programs and extend that benefit to the 
qualified low-income Medicare beneficiaries, CLMBs, SLMBs and 
others. It's clear we need to make sure that, you know, that 
program is utilizing accurate data as well.
    Mr. Grob. That, by the way, is an excellent point I think, 
for efficiency. Because again--laying aside the other part of 
the Medicaid, their use of AWP and this kind of thing, which 
has the same problems if not worse than Medicare in some 
cases--going back to the single data source, I think the point 
is excellent, because then you would have one set of data, 
which the manufacturers are saying is correct, submitting it to 
the government under a statutory requirement, subject to audit 
and review. It forms a good base case for anything else you 
want to do.
    Now, you could then take that base case, you could, say, 
make our percentage higher than that, or something lower. You 
could then test it with some samples. But it gives you a nice 
centralized piece. When we tried to come up with these ideas, 
we know that none of them will work perfectly, but we were 
looking for some practical ideas, something that is within the 
means to actually do it. That one kept emerging as one of the 
good starting points, if you will, for data.
    Mr. Ganske. I thank you. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman.
    The Chair thanks the witnesses for their 3\1/2\ hours of 
endurance. Your testimony has been extremely valuable to us, 
and the interest has been high. We appreciate your 
contributions. Thank you, and you are excused.
    Mr. Greenwood. Now we call forth Mr. Thomas Scully, the 
Administrator for the Centers for Medicare and Medicaid 
Services; and we thank you in advance for your forbearance. As 
has been your habit, you have been here for the entire hearing, 
and probably only adding to the agony of waiting is watching 
the membership dwindle from 25 to three. But we look forward to 
your testimony.
    Mr. Scully. Thank you, Mr. Chairman, Chairman Tauzin, Mr. 
Brown----
    Mr. Greenwood. Before you begin your testimony, you're 
aware, Mr. Scully, that this is a joint hearing between the 
Oversight and Investigations Subcommittee and the Health 
Subcommittee, and it is our practice--the practice of the 
Oversight and Investigations Subcommittee to take our testimony 
under oath. Do you have any objections to testifying under 
oath?
    Also consistent with the rules of the House and the 
committee, you have the right to be represented by an attorney. 
Do you wish to be represented by an attorney?
    Mr. Scully. I used to be a bad attorney.
    Mr. Greenwood. So saying, I'll administer the oath.
    [Witness sworn.]
    Mr. Greenwood. You're now under oath, and you're recognized 
for your testimony.

   TESTIMONY OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS FOR 
                 MEDICARE AND MEDICAID SERVICES

    Mr. Scully. Thank you, Mr. Chairman, for having me.
    I will quickly get to AWP. I'm not sure how much I have 
left to add after that, but a few ideas I hope.
    If I could, just quickly, before I get to that, I just 
wanted to thank a lot of the--you talked about New York 
earlier, and I'd just like to thank the New York hospitals who 
we spent a lot of time working with the last few weeks. I wish 
we had more people in the hospitals. But a lot of you also 
don't realize that outside the hospitals in the bottom part of 
Manhattan there are also a lot of disabled people that weren't 
getting home health. And since I have a chance to publicly, I'd 
like to thank the home health agencies. The Visiting Nurse 
Association of New York was particularly terrific in the last 2 
weeks. But I think a lot of the health care problems that 
weren't directly related to the World Trade Centers in the 
southern Manhattan have been dealt with incredibly well by the 
City, the State and hopefully with a little bit of help from 
CMS but with a lot of help from some incredibly selfless 
providers in lower New York.
    Second, if I could just before I get into the AWP issue, 
one issue that I've become extremely focused on the last 2 
weeks since I've now been at the CMS about 3\1/2\ months has 
been a problem you're probably going to get to, if not this 
year certainly next year, which is HIPAA compliance. And I've 
recently been extremely focused in the last week on the fact 
that, like it or not, in a year we have to have a completely 
new coding system put in place for all providers--Medicare, 
Medicaid, everyone else.
    I don't think I've talked about it enough since I've been 
on the job. I've only recently begun to understand what a 
gigantic mission that is, and I think it's obviously like 
Nancy-Ann's mission to focus the industry on Y2K; and my 
predecessor, I think it's our mission in the next year to focus 
people on HIPAA. And whether Congress changes or delays the law 
or not, we could have a debate about that, I'm sure, at a 
future time. We have a big, big mission in front of us with 
HIPAA in the next year, and I intend to--in every speech I give 
and every time I testify or talk about it, if nothing else, 
raise the awareness of providers that we have a major, major 
change in the health financing system that we have to deal with 
outside this.
    Anyway, switching back to HIPAA, the one thing I can say to 
start with--and I'll try not to go through every issue again--
is we agree. And my frustration with the hearing, if anything, 
is that I hope most of the members that were here didn't leave 
with the idea that CMS all the way back to Bruce Lanakin before 
has not been focused on this. And the press also may have 
already left.
    I was involved in this in 1991 in the first Bush 
administration. We tried to fix it, and there's a long track 
record from 1991 to 1992.
    I was very involved, by the way, in Andrews Air Force Base 
in creating Medicaid drug rebates with Chris Jennings who was 
on the Hill, President Clinton's most recent--so I have a long 
history in Medicaid drug rebates.
    This whole issue, people have been trying to fix this for 
years. And back to Secretary Shalala and Nancy-Ann DeParle last 
year, they tried to fix it. Got an outpouring of screaming from 
every affected party, appropriate or inappropriate, and then 
were hit with a Congressional prohibition for a year not to 
look at it.
    So where we are currently at CMS is we're prohibited, until 
the GAO report that came out today and until the Secretary 
reads it, is what the law says, we cannot respond to it. 
Certainly it will take us a while to put out a rule. But also 
we're required by law to pay 95 percent of AWP.
    Now, could I creatively go back and change it? I'm sure we 
probably could, and we'd be willing to look at that, but I also 
have no doubt we'd be sued and it's not the easiest way to fix 
it.
    So I'm here to talk about a number of issues today, but one 
thing I would ask for is I think this cries out for a 
legislative solution. We're very anxious to work with you on a 
legislative solution. I hope we can do it this year before you 
leave, and we'll give all our staff resources and everything we 
can to help you fix it. It's an issue that's been around for a 
long time, and I'm excited that Chairman Tauzin, you, Mr. 
Brown, Mr. Deutsch and everyone else seem to be in agreement 
that we need to fix it; and whatever help you need from CMS on 
a technical basis to fix it, we are very, very anxious to do 
so.
    We have been paying more than any other purchaser for 
Medicare drugs on an outpatient basis for a long time, and 
we're determined to get the price down to a reasonable level. 
What that is, I'll try to give you a few ideas.
    In the meantime, I do think, however, the concern--it is a 
legitimate concern for the providers--is that if you're going 
to lower--do we always fix the right price in Medicare, which 
is what we do for providers? Probably not. Do we have the right 
price for oncologists and their practice expenses? Probably 
not.
    I think at the same time we reduce the prices for the drugs 
we need to go back and look at oncologists. I think we probably 
need to look at the ESRD clinics, dialysis centers that also 
use these drugs quite a bit. Hemophiliac agencies also rely on 
this to a large degree. DME providers probably have some 
argument.
    I'm not saying they should all have their rates increased, 
but there is a substantial amount of money to be saved here. 
And I think at the same time we do that I think we should also 
go back and look at the base payment rates and make sure 
there's a balance. I have very little doubt it's not dollar for 
dollar, as you're aware and we've talked about, but I do think 
it's appropriate to make sure that, to the extent we can set 
prices right for drugs, then for practice expenses, then for 
practice patterns, we should set them right. And I think 
there's very little doubt they're not right right now.
    But in fairness to Nancy-Ann DePerle, my predecessor in the 
agency, I think this is something the agency has been trying to 
do for years, and every time it's put its head up, it's got 
creamed. So we're anxious and excited that many Members of 
Congress are now aware of it and are interested in fixing it as 
well.
    Let me just talk quickly and give you a couple of 
suggestions. One is, Mr. Deutsch and Chairman Tauzin both 
mentioned that this is not just a problem with the Medicare 
program, it's a huge problem for beneficiaries. And I totally 
agree. The fact that the beneficiaries pay the 20 percent 
copayments is a gigantic problem. There are a lot of things 
wrong with the Medicare problem. There are very few places 
where beneficiaries feel the inequities of the program as much 
as they do here. So I think it's important that the chairman 
focused on that, and I think that we need to focus on that in 
the fix. Seniors are paying a big chunk of the inequities in 
the drug payments that we have here.
    Second point, 20 drugs account for 75 percent of the 
spending in this area. So do we have the tools to look at it? 
We do, and we can talk a little bit about Medicaid and what we 
have available in Medicaid. The numbers are big, but the number 
of drugs you're dealing with are relatively small. Single 
source drugs account for 60 percent of all the Medicare drug 
spending. So it's relatively narrow. The numbers are big, but 
the numbers of drugs we're talking about are relatively narrow. 
So I think if we focus on this problem, hopefully 
legislatively, it is very fixable.
    A fourth point I'd make is that I think we need to be 
sensitive. Physicians do in fact--back as far as I believe it 
was 1997--actually it was 1991 was the first time I believe 
that then HCFA proposed to have 85 percent of AWP. Then 
physicians came back and said we can't get it for 85 percent of 
AWP. And that may be the case. I think it's important when we 
look at new reimbursement systems that we understand it's not 
like the Federal supply schedule where the VA sets prices. 
Doctors actually have to go out and buy this on the market. And 
while the prices may be outrageous, they actually have to go 
get it.
    So our real issue is to focus on the manufacturers and how 
we get the money back at the end of the game from the--to the 
manufacturers--hopefully no game at the end of the day from 
manufacturers. And it is a legitimate problem that physicians 
out there around the country can't always get it for less than 
a certain amount of AWP.
    So I think we need to look at the bottom line of what the 
program is paying without squeezing providers to the point 
where physicians out there in the real world can't get ahold of 
it. And I think in our legislative--hopefully legislative fix, 
we need to look at that.
    There are a number of different approaches that you have 
talked about, and I'll just try to run through a couple of them 
that I think are possible.
    The Federal supply schedule has been mentioned. I think 
that when you look at the VA and when you look at the agencies, 
Coast Guard and others in the Federal supply schedule, it's 
really not an apples to apples comparison. I think that 
probably wouldn't work. Those are really Federal agencies 
buying the drugs for direct use in Federal agencies.
    Average manufacturers' price, which is the bottom line 
number that was used in the Medicaid program, and we do in fact 
have those numbers and they are audited and I think they're 
pretty solid, but again, by statute they're confidential and 
we're not allowed to use them. In fact, our Medicare staff 
doesn't have access to them. Only the Medicaid staff does. So 
is that a more legitimate number? Absolutely.
    I think there may be some problems there, but average 
manufacturers' price, which GAO seemed to suggest is a very 
auditable and very reasonable number, I think if you went to 
average manufacturers' price, you might run the risk of 
squeezing access to physicians out there in the market trying 
to buy them. So I think there's a possibility.
    I think the Medicaid program has some flaws, but there's a 
model there, and I'll suggest that in a second.
    You've talked about wholesale acquisition costs which I 
think is a better price than AWP. But, again, AWP is largely 
air, and I think wholesale acquisition costs may be a little 
better, but it's still potentially air, and you can raise it 
and lower it as you like, and I think it's a very--the 
potential for manipulation of that is relatively high as well. 
As a short-term fix it might work, but I think there are 
probably better ones.
    People have proposed that we do a survey of market prices, 
which also might work. I talked to my staff about trying to do 
a survey of what nursing homes pay, for instance, because 
nursing home chains usually have--they're not as big as the 
Federal supply schedule, but large nursing homes, Manor Care, 
somebody like that frequently buys--you know, has a similar 
group of patients buying in large bulk volume.
    The problem in doing that--and I think that's a 
possibility--is that you're looking back a year. And obviously, 
as you can see from the earlier testimony, the prices change by 
the day, and looking back and doing a snapshot looking back a 
year at anybody, for us to do a survey of 2000 prices to set 
2001 prices is never going to be quite right. So I think that 
has its flaws as well.
    There is a concept similar to average manufacturers' price 
called average sales price that you could possibly use, but I 
think a combination of these we certainly could work on 
legislatively, and I think the bottom line is that the 
manufacturers know at the end of the day how many units they're 
selling to Medicare. They know how many we're paying for.
    If we can, in fact, require them, as we do in Medicaid, to 
tell us what the price is and calculate at the end of the year 
how many they sold to Medicare and what the price is and 
recover that price and there is a mechanism to do that, I think 
to find that balance that we end up getting the right price 
charged us by the manufacturer, while not limiting and denying 
access to the physicians that are actually out there in the 
market, potentially in a small town trying to get it, is the 
mix that we need to find, and I think it's very doable.
    Can we do this administratively? I think we probably won't 
in the near term, because we probably would get sued. We'd 
certainly prefer to do it legislatively. I think we could. And 
if Congress doesn't act, it would probably take us a year to a 
year and a half to do it. It would take a long rulemaking 
process. I have zero doubt that we'd be sued, because of what 
the law says on 95 percent of AWP.
    So I would strongly, strongly, strongly prefer to work with 
Congress hopefully in the next month to find a legislative 
solution that works, that is fair to the oncologists, that is 
fair to the dialysis clinics, that is fair to the other patient 
groups involved and that gets our payment back on the right 
track. Because it's clearly a very messy system we're in right 
now.
    So I know you've had a long hearing already. That's about 
as fast as I can talk, and I skipped over a whole bunch of 
other things I was going to say, but I hope--it may be more 
valuable just to answer questions. But there is zero doubt that 
the administration, while we don't have the set solution, is 
extremely interested in working to fix this problem.
    [The prepared statement of Thomas A. Scully follows:]
  Prepared Statement of Thomas A. Scully, Administrator, Centers for 
                      Medicare & Medicaid Services
    Chairman Greenwood, Chairman Bilirakis, Congressman Deutsch, 
Congressman Brown, distinguished Subcommittee members, thank you for 
inviting me to discuss Medicare payment for outpatient prescription 
drugs. As you know, prescription drugs are becoming an increasingly 
important component of modern health care, particularly for Medicare 
beneficiaries. We are working with Congress to modernize Medicare to 
cover prescription drugs and provide relief to seniors from high drug 
costs. In addition, it is clear that the payment system for selected 
outpatient drugs that are now covered by Medicare is a mess. Medicare 
now pays more than many other purchasers for the drugs we cover due to 
the way that drug manufacturers report their prices and Medicare's 
payment policies. Medicare should pay appropriately for all Medicare 
benefits, including the drugs we currently cover, and it is 
unacceptable that the current system results in Medicare paying 
excessive prices. We also need to pay appropriately for the services 
required to furnish these drugs. I appreciate your dedication and 
leadership on this issue, and I look forward to working with you and 
your colleagues to ensure that Medicare beneficiaries have access to 
the drugs they need and that Medicare pays competitive prices for these 
prescription drugs.
    By law, Medicare does not pay for most outpatient prescription 
drugs. However, there are some specific exceptions where Medicare 
covers pharmaceuticals, such as drugs furnished incident to a 
physician's covered services, and in these cases, the law mandates that 
we pay physicians and other providers based on the lower of the billed 
charge or 95 percent of the drugs' average wholesale price (AWP). 
Numerous studies have indicated that the industry's reported wholesale 
prices, the data on which Medicare payments are based, are vastly 
higher than the amounts that drug manufacturers and wholesalers 
actually charge providers. That means Medicare beneficiaries, through 
their premiums and cost sharing, and U.S. taxpayers are spending far 
more than the ``average'' price that we believe the law intended them 
to pay. Some affected physicians and providers have suggested that they 
need these Medicare ``drug profits'' to cross subsidize what they 
believe are inadequate Medicare payments for services related to 
furnishing the drugs, such as the administration of chemotherapy for 
cancer. I believe we need to pay appropriately for both the drugs and 
the services related to furnishing the drugs.
    Clearly, Medicare drug pricing is a complex issue. Over the years, 
numerous legislative efforts have failed to develop an effective 
alternative to AWP and ensure that Medicare and its beneficiaries do 
not pay more than they should for the limited number of prescription 
drugs that Medicare covers. We are committed to working with Congress 
on a bipartisan basis to ensure that Medicare pays accurately for all 
of its benefits. As we look to the future, particularly in the context 
of developing a Medicare drug benefit that does not make the same 
mistakes, I think it might be important to review previous efforts to 
reform the AWP payments so that together we can develop a workable 
solution.
                    medicare's limited drug benefit
    The Centers for Medicare & Medicaid Services (CMS) pays most of the 
health care expenses of almost 40 million Medicare beneficiaries. If we 
were creating the Medicare program today, a prescription drug benefit 
certainly would be included. However, in 1965, prescription drugs 
played a less prominent role in health care, and the emphasis then was 
on ensuring access to inpatient hospital care in Medicare Part A and 
providing access to physicians in Medicare Part B. Today, Medicare 
beneficiaries rely on prescription drugs as an integral part of their 
health care. Although by law, Medicare does not generally cover over-
the-counter or outpatient prescription drugs, currently Medicare does 
cover some drugs, including:

 Drugs that are not self-administered and furnished ``incident 
        to'' a physician's service, such as prostate cancer drugs;
 Certain self-administered oral cancer and anti-nausea drugs;
 Certain drugs used as part of durable medical equipment or 
        infusion devices, (e.g., the albuterol that is put into 
        nebulizers, which are devices used by asthma patients);
 Immunosuppressive drugs, which are used following organ 
        transplants;
 Erythropoietin (EPO), far and away the drug Medicare spends 
        the most money on, is used primarily to treat anemia in end 
        stage renal disease patients and in cancer patients; and
 Osteoporosis drugs furnished to certain beneficiaries by home 
        health agencies.
    These drugs are typically provided in the hospital outpatient 
setting, dialysis centers, or in the doctor's office, and are purchased 
directly by the physician or provider. Additionally, vaccines for 
diseases like influenza, pneumonia, and hepatitis are considered drugs, 
and are covered by Medicare.
    By law, we generally pay for these drugs based on the actual charge 
or 95 percent of the AWP, whichever is lower. This adds up to more than 
$5 billion a year for currently covered drugs, approximately 80 percent 
of which is paid for by the Medicare program. In general, Medicare 
beneficiaries must also share in the cost of purchasing these drugs 
through their Part B premiums, and except for the flu and pneumonia 
vaccines, the $100 Part B annual deductible, and a 20 percent 
coinsurance.
              medicare payment for currently covered drugs
    The AWP is intended to represent the average price at which 
wholesalers sell drugs to their customers, which include physicians and 
pharmacies. Traditionally, AWP has been based on prices reported by 
drug manufacturers and published in compendia such as the Red Book, 
which is published by Medical Economics Company, Inc. However, 
manufacturers and wholesalers increasingly give physicians and 
providers discounts that reduce the actual amount that the physician or 
provider actually pays for the drugs. These discounts are not reflected 
in the published price and reduce the amount providers actually pay to 
levels far below those prices published in the Red Book. Furthermore, 
use of the AWP, as reported by manufacturers to companies which compile 
such prices creates a situation where a manufacturer can, for certain 
drugs, increase the reported AWP and, in turn, offer physicians a 
deeper discount.
    This Committee, CMS, the Department's Office of the Inspector 
General (IG), and others have long recognized the shortcomings of AWP 
as a way for Medicare to reimburse for drugs. The IG has published 
numerous reports showing that true market prices for the top drugs 
billed to the Medicare program by physicians, independent dialysis 
facilities, and durable medical equipment suppliers were actually 
significantly less than the AWP reported in the Red Book and like 
publications. As competitive discounts have become widespread, the AWP 
mechanism has resulted in increasing payment distortions. However, 
Medicare has continued to pay for these drugs based on the reported AWP 
amount. By offering physicians and providers deep discounts compared to 
the price they could bill Medicare, the drug manufacturers are able to 
use profit margins to manipulate physicians and providers to use their 
products for Medicare beneficiaries. It is simply unacceptable for 
Medicare to continue paying for drugs in a way that costs beneficiaries 
and the program far more than it should.
    In the past, the Agency has attempted to remedy disparities between 
Medicare payments based on AWP and the amount actually paid 
competitively by physicians and providers. However, these efforts have 
not been successful. For example, in CMS/HCFA's June 1991 proposed 
physician fee schedule, the Agency proposed that payment be based on 85 
percent of AWP. We also proposed that certain very high volume drugs be 
reimbursed at levels equal to the lesser of 85 percent of AWP or the 
physician's or provider's estimated acquisition cost. We received many 
comments, primarily from oncologists, indicating that this 85 percent 
standard was inappropriate. Most comments indicated that while many 
drugs could be purchased for less than 85 percent of AWP, other drugs 
were not discounted. Others suggested that while pharmacies and perhaps 
large practices could receive substantial discounts on their drug 
prices, individual physicians could not. As an alternative, beginning 
with 1992, a policy was established for Medicare to pay the AWP or the 
estimated acquisition cost, whichever was less.
    Since the Estimated Acquisition Cost approach proved to be 
unworkable, subsequent legislation was proposed that would have 
required Medicare to pay physicians their actual acquisition cost for 
drugs. Under this proposal, physicians would tell Medicare what they 
paid for the drugs and be reimbursed that amount, rather than the 
Agency developing an estimate of acquisition costs and paying 
physicians based on that estimate. After considering this proposal, 
Congress adopted an alternative approach in the Balanced Budget Act of 
1997 (BBA), setting Medicare's payment for drugs at the lesser of the 
billed charge or 95 percent of AWP. While this brought Medicare 
payments closer to the prices that physicians and providers pay for 
drugs, Medicare payments were still significantly greater than the 
competitive discounts obtained by physicians and the system still tied 
Medicare payments to the artificially inflated industry-reported list 
prices. In fact, in a December 1997 report, the IG found payments based 
on AWP to be substantially greater than the prices available to the 
physician community. As an alternative to actual acquisition costs, 
Congress considered proposals to pay all Medicare drugs at 83 percent 
of AWP, a compromise between 95 percent of the AWP and the average 
discount found by the IG.
    In May 2000, the DOJ and the National Association of Medicaid Fraud 
Control Units made accurate market wholesale prices for 49 drugs 
covered by Medicaid available to State Medicaid programs and to First 
Data Bank, a drug price compendia owned by the Hearst Corporation. 
These wholesale prices, culled from wholesale catalogs circulated among 
the provider community, reflected the actual Average Wholesale Prices 
for these drugs far more accurately than the drug manufacturers' AWP. 
Last year, HCFA sent this new information to Medicare carriers and 
instructed them to consider these alternative wholesale prices as 
another source of AWP data in determining their January 1, 2001 
quarterly update for many of these drugs. However, due to concerns 
about Medicare payments related to the administration of the 
chemotherapy and clotting factor drugs, the Administration instructed 
our carriers not to use the data for those drugs at that time.
    In December 2000, Congress enacted the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act (BIPA), which established 
a moratorium on decreases in Medicare drug payments while the General 
Accounting Office (GAO) conducted a study of Medicare drug pricing and 
related payment issues. HCFA postponed Medicare carriers' use of the 
DOJ data until we could review the GAO report. We look forward to 
reviewing the GAO's findings and working with you to revise Medicare's 
drug payment policy. We must ensure that beneficiaries and Medicare pay 
appropriately for both the drugs that we cover and the services related 
to furnishing the drugs.
                               conclusion
    Medicare beneficiaries rely on prescription drugs, and the 
coinsurance they pay for covered drugs is tied directly to the prices 
that Medicare pays. We must find a competitive way to ensure that 
Medicare beneficiaries and taxpayers are no longer paying excessive 
prices for drugs that are far above the competitive discounts that are 
widely available today. We need to pay appropriately for all Medicare 
benefits, including the prescription drugs we cover and the services 
required to furnish those drugs. We look forward to reviewing the GAO 
report, and working with you Mr. Chairman, this Subcommittee, and the 
Congress to revise Medicare's payment policy for currently covered 
drugs. Thank you for the opportunity to discuss this important issue 
with you today, and I am happy to answer your questions.

    Mr. Greenwood. Thank you, Mr. Scully. We appreciate your 
testimony and your presence and again your endurance in staying 
with us all this time.
    Let me, first of all, comment on why the 85 percent of AWP 
obviously won't work. Because, as we've seen, some AWPs are 
actually straight; and particularly when there's no competition 
there's no incentive for the drug companies to falsify the AWP. 
So to reimburse 85 percent wouldn't be fair for those who are 
paying a hundred percent of the AWP, because the physicians 
would lose money every time. So clearly that won't work.
    We do have five principles that my staff and I have worked 
out in terms of what we think the direction of the legislation 
that we hope to enact into law in the next month is, and I'd 
just like to tick these off for you and see if we have general 
conceptual agreement on how to proceed.
    No. 1 is that any new drug reimbursement should not 
adversely impact Medicare patient access to quality health 
care. Would you like me to repeat that?
    Mr. Scully. I'm sorry. I was trying to find your----
    Mr. Greenwood. The question is, would you agree in concept 
with these five principles for legislation: Any new drug 
reimbursement should not adversely impact Medicare patient 
access to quality health care?
    Mr. Scully. Sure. Absolutely.
    Mr. Greenwood. That is a no-brainer.
    Mr. Scully. That was an easy one. Thank you.
    Mr. Greenwood. Medicare's reimbursement for coverage drugs 
should be closely linked to the prices that providers actually 
pay for the drugs.
    Mr. Scully. I think that is the bottom line goal, yes.
    Mr. Greenwood. Three, Medicare services and administration 
should be reimbursed according to their costs, exclusive of any 
reference to drug reimbursements?
    Mr. Scully. The only caveat I'll put into that is, having 
been in the hospital business for years, costs--but, yeah, 
actual, real expenses, yes, because cost is what we paid for 
for years, and that is real life.
    Mr. Greenwood. Understood.
    Fourth, the impact of Medicare's drug reimbursement 
policies have--upon the making of clinical decisions should be 
eliminated or reduced to the greatest extent possible.
    Mr. Scully. Yes. I think absolutely.
    Mr. Greenwood. Okay. And, fifth, Medicare's reimbursement 
for treatments in related settings should be equalized to 
discourage migration between settings based upon relative 
levels of profit available to providers.
    Mr. Scully. Yes.
    Mr. Greenwood. Bottom line there is we don't want to drive 
these patients certainly back to a hospital setting which costs 
Medicare more and is sometimes a less pleasant experience for 
the patient.
    Let me ask you this. These principles are not rocket 
science. This is a very manageable issue, as far as I'm 
concerned, based on my research here. The GAO report today 
gives us the foundation in terms of the expenses or costs for 
the oncologists. I hope we'll erase what has been an obstacle 
before, which is the legitimate concern raised by Members of 
Congress, frankly, because we do not have the data to forestall 
anything that might have some of these adverse effects on 
patients or providers.
    If in fact we can put a legislative solution into some kind 
of an omnibus package that we sign into law--have signed into 
law, let us say sometime in October, do you have a sense from 
talking with your staff yet how long it might take CMS? How 
much time do you need to enact this so that we get a good 
system that works well, meets all of these objectives and 
begins to save the beneficiaries and Medicare the billions of 
dollars that we've talked about?
    Mr. Scully. Well, clearly you can start paying different 
drug prices in AWP pretty quickly. The real issue is making--I 
think there is some legitimate argument that oncologists, as I 
mentioned, dialysis clinics--there are a variety of practice 
groups, at least an argument I've heard, on DME providers. The 
issue is that we put out our rates on January 1. Most of those 
rates are already in place. The systems are hard to change. The 
issue is from an equity point of view, and if there are 
providers that rely on inappropriately high AWP payments----
    Mr. Greenwood. If I may, I should have included--
incorporated that in my question. But if we give you the 
objective of coordinating in time this two-step process, move 
from AWP to a more cost-related--price-related reimbursement 
rate and reset the practice expense and the reimbursements for 
these specialties who are--specialists who will in fact lose 
revenue as a result of this change, how long would that take?
    Mr. Scully. The quickest way we could rationally do it--
again, I can tell you what my--all the people that have to do 
the actual work, which a lot of people forget. There's actually 
lots of people in Baltimore here that have to actually do this. 
The quickest way you really do it is fiscal year 2003, for the 
fee schedules that come out in January of 2003, because that is 
really only the time you go back and recalibrate up the 
practice expenses and everything else.
    It's possible--nobody is happy with this answer in CMS, I 
can tell you, but it's possible that if you directed us and you 
put money into the second half of 2002, that for the last two 
quarters of 2002, we could possibly--and I'm not even certain 
of this now--recalibrate some of the payments up.
    We certainly can pay less on AWP, but if you're trying to 
find the balance, what I've heard from oncologists and others 
is, if you're going to cut the AWP, which we rely on, you need 
to fix the practice expense at the same time and in the same 
bill. I imagine they wouldn't be very happy to have the drug 
reimbursement cut at the same time the practice expenses don't 
go up. So pushing the envelope as much as it possibly can be--
and I can tell you this is an extremely unpopular opinion with 
the staff at CMS--the fastest we could possibly do it is 
probably next July, and under normal circumstances, the fastest 
we could do it is January of 2003.
    Mr. Greenwood. That is very helpful. I appreciate that.
    My time has expired. The Chair recognizes the gentleman 
from Ohio, Mr. Brown, for 5 minutes.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Scully, nice to have you in front of the subcommittee.
    You have the authority now to use an inherent 
reasonableness standard to reduce reimbursements for Medicare 
drugs which basically bear no resemblance to actual costs or 
actual cost plus. Do you have that story?
    Mr. Scully. I think we do. I think the issue here is, as I 
mentioned, the agencies have a hard time getting around that. 
We actually sent out guidance of what we thought was an AWP--
not me, but, as you know, Nancy-Ann DePerle and Secretary 
Shalala--about a year and a half ago to have our carriers 
interpret what was a low AWP, and there was quite an uproar 
about that, and the result of it was a legislative prohibition 
about changing it. So it's very debatable from a legal point of 
view as to whether we do have the authority. So if Congress 
doesn't act, we'll certainly look into it, but it would be far 
preferable to have legislative guidance.
    Mr. Brown. Wasn't there a GAO review and they said it was 
adequate? GAO did a review and said it was adequate?
    Mr. Scully. A review of the practice expenses or the----
    Mr. Brown. Of the inherit reasonableness.
    Mr. Scully. I think I read the report last night, and I 
think that--their view was we have an inherent reasonableness 
authority to interpret what the AWP is, and I believe he said 
in his testimony that it says average wholesale price in the 
statute. But as a former pretty bad lawyer, somebody who has 
had--been sued numerous times this fall, I would say that with 
the track record of having the government use the AWP for 30 
years, I would have very little doubt that our authority to do 
that would be challenged. We certainly are willing to do it if 
it comes to that, but it would be much sounder I think if we 
get legislative guidance.
    Mr. Brown. Would it be appropriate first, Mr. Chairman, or 
Mr. Scanlon to address that, that the GAO did in fact find 
that. Correct?
    Mr. Scanlon. We reported on the expedited inherent 
reasonableness authority that you gave to the agency in the 
Balanced Budget Act which allows for up to a 15 percent 
reduction, again, in an expedited fashion. Whether we have the 
ability to redefine AWP and define it any way we'd like is a 
somewhat dicey legal issue. We're happy to--believe me, we're 
very anxious as you are to fix this. I would say it would be 
certainly much more likely to succeed if we had additional 
legislative guidance.
    Mr. Brown. Could you submit a legal opinion for the record 
on that?
    Mr. Scanlon. Sure.
    Mr. Brown. Let me shift gears for a second. Before that, I 
just--if in fact you can do that, using an inherent 
reasonableness standard to reduce reimbursements, I would hope 
that CMS could be more aggressive. I guess you have a pilot 
project in Texas and look to do more of that for competitive 
pricing in the months ahead.
    All the talk about the solutions that have been bandied 
about in the prior panel and from opening statements and 
others, if Medicare changes the way that Congress pays for 
prescription drugs, obviously then changing the reimbursement 
rate for oncologists and saying that the practice expense 
payment system needs to be adjusted, what does that do--my 
understanding is the entire pool of practice expense payment 
needs to be budget neutral. Does that mean any increase in 
practice expenses for oncologists would then cause a reduction 
in practice expenses for other specialties?
    Mr. Scully. Well, under current law it would or wouldn't 
change, and I personally would not recommend us doing that, 
because I don't think we should be taking funds from other 
practice expenses to fund oncology. I think the discussion 
that's been had in some quarters about legislation is that if 
you're going to change the AWP legislatively you will get 
significant baseline savings, and some of that could go back 
into just adding in a nonbudget neutral fashion back into the 
practice expense pot, which you can do legislatively to 
increase, where appropriate, some practice expenses in some 
areas without taking it from others.
    But, clearly, without legislation, any practice expense 
change has to be budget neutral.
    Mr. Brown. So if we were to do that, do you have any 
suggestions on the amounts of--you, first of all, say we in a 
sense legislatively break the budget neutral concept of 
practice expense, at least for this particular case. What kind 
of money do you talk about in terms of the oncologists then 
versus what we've done?
    Mr. Scully. Chairman Greenwood and I talked about this a 
little bit, and he--apparently in the GAO reports read last 
night, they suggested $51 million. It's not always easy to get 
a quick back-of-the-envelope read from my staff, but I think 
that number is in the ballpark. It's close, somewhere in the 
40--I mentioned to him that our back-of-the-envelope number was 
pretty close to that, in the $45 to $55 million range.
    Mr. Brown. What are you hearing from other physicians, 
other specialties about the practice expense issue?
    Mr. Scully. You know, in fairness, I was one of the 
drafters of my first job and the first--one of my first jobs in 
the first Bush administration was passing RVRS in 1989, since I 
was primarily responsible for the administration's position 
back then.
    One of the reasons I like it----
    Mr. Brown. A lot of complaints should be directed to you 
then.
    Mr. Scully. Yeah. It's all my fault. They didn't like it 
much back then, but, in fairness, I think the system has worked 
reasonably well. If you look at all the other reimbursements 
over the last 15 years, nursing homes, hospitals, everything 
else has been an up-and-down roller coaster. Physician 
reimbursement has been relatively--as I'm sure the physicians 
on the committee might not agree, but I think generally even 
the AMA would tell you that, relative to other reimbursements 
in Medicare, it's been more predictable and more stable and the 
system has worked reasonably well.
    The thing about practice expense is that basically we rely 
98 percent of the time on the--what's called the RUC, which is 
essentially the committee through the physician groups to 
recommend what the practice expenses should be. So if the 
oncologists think they're underpaid, they have to come argue 
why it should come out of the oncologists versus the surgeons, 
versus the gastroenterologists, and they sit around a table 
every year and make recommendations, the vast majority of which 
we take. But it's a finite pot, and I think it works reasonably 
well.
    So the issue here is--it's the physicians all sitting 
around the table with CMS saying who is underpaid and who is 
overpaid, and they're all arguing over a finite pot that you've 
authorized. And I think it works actually reasonably well. I 
mean, everybody is unhappy, but once everybody is unhappy that 
usually means it's working right.
    Mr. Brown. Thank you, Mr. Chairman.
    Chairman Tauzin. I thank my friend. The Chair recognized 
him so briefly for a round of questions.
    Thanks for coming, Mr. Scully. Of course we appreciate you 
being here.
    Let me ask you in regard to that finite pot. If we are 
going to work out a solution that establishes a responsible 
AWP, something more akin to the real cost of the drug, and it 
reduces the income to the oncologists significantly and the 
oncologist does have a claim that he is under-reimbursed for 
practice expenses, which you and I think GAO both have conceded 
is true, at least to some extent--you've identified it around 
$50 million. If we simply say that we're going to permit the 
oncologist to have a larger share of that finite pool, does 
that ipso facto mean that other physicians, other service 
providers will lose reimbursement as a result?
    Mr. Scully. If we were directed to do that administratively 
without new money in the pot, it would, but my hope would be 
that in the same--what I've heard from responsible oncologists, 
of which there are many, is that they agree that many of the 
things in the system are broken and in fact if we fixed in the 
same bill simultaneously AWP and adjusted their practice 
expenses, they don't think that is necessarily unfair. Now some 
may disagree with that.
    Chairman Tauzin. Provided we increased the pool to 
accommodate to whatever few reimbursements we ought to provide 
for those physicians. Is that correct?
    Mr. Scully. Once again, in fairness, Mr. Chairman, I 
think--and I'd like to work with your staff on--I do think it's 
not oncologists who've made the most noise on this. I do think 
dialysis providers of a number of drugs and I think hemophilia 
agencies do. And, to a lesser degree, we ought to look at other 
providers and make sure they also are made whole.
    Chairman Tauzin. We've got to look at every single provider 
that may be losing income as a result of a change in AWP and 
examine whether or not in fact their practice is being properly 
reimbursed under the current system. Is that correct?
    Mr. Scully. Yes.
    Chairman Tauzin. And we need to come up with a number that 
we need to add to the pool to make it fair, and there is a 
disagreement on that number, right? I mean, you and GAO have a 
number around 50----
    Mr. Scully. Pretty close. I think we're pretty close.
    Chairman Tauzin. I've heard some extraordinary numbers 
coming from some of the care providers. So we're going to have 
to somehow provide some rationale for a proper number. Is that 
correct?
    Mr. Scully. Yes, sir.
    Chairman Tauzin. Second, why don't you now use the average 
manufacturers' price and best price under the Medicaid rebate 
program in establishing an average wholesale--or average 
wholesale price? I think I know the answer why you don't, but 
tell me.
    Mr. Scully. I believe it's statutory. That's another thing 
that I hate to say that I helped create at Andrews Air Force 
Base in----
    Chairman Tauzin. So if you're going to use it, we have to 
change the law?
    Mr. Scully. If you wanted--the way it works is we do use 
average manufacturers' price, I believe, and my staff might 
correct me if I'm wrong, but the rebate--it comes up that the 
difference between the AWP that's charged and the average 
manufacturers' price is just a small piece of it. So you could, 
in fact, correct Medicaid law as well and arguably make it more 
appropriate.
    Now, the two sides--just to give the other side, you 
probably hear from private insurance companies is there's no 
doubt what we're paying in Medicare in a big way and arguably 
in Medicaid in a smaller way, but when you put those two 
programs together and you squeeze the pot that's going to 
bounce back on the private insurers. So--to some degree.
    Now, there's no question to some it's excessive margin. But 
if you take Medicare and Medicaid which are--at least in the 
hospital outpatient setting, 40 percent of that is usually 
Medicare. Maybe 12, 14 percent is Medicaid. Then you squeeze 
down on their reimbursement there, which we certainly need to 
do, you're going to have the insurers and others on the private 
payer side come back and say our drug prices just went up.
    Now, again, I would very much doubt that is a wash. I think 
the margins on the Medicare side are extreme, to say the least.
    Chairman Tauzin. And you both tend to say that. We have at 
least some evidence coming in from the other side claiming that 
it's a wash. We're going to have to again get some sort of 
arbitration on that number to find out what it is.
    Mr. Scully. I think generally the insurance plans are--you 
know, they have the flexibility to negotiate prices, and they 
generally can fend for themselves pretty well, but you will 
hear a push back from the other side.
    Chairman Tauzin. Let me ask you a very simple question that 
I think I know the answer to, but you might give us some 
insight on it. Why on earth do we have a system that requires a 
Medicare beneficiary to pay 20 percent as a copay of an 
artificial price? It can exceed the real cost of the drug to 
the physician. What would happen if the law would change or 
some provision were made, either administratively or by change 
of law, to require that the 20 percent copay would be 20 
percent of the real price paid by the care provider for the 
drug? What is wrong with that?
    Mr. Scully. Other than the budget spending, it sounds like 
a great idea, and I think----
    Chairman Tauzin. It would save American patients $177 
million that they're spending on excessive copays, because 
copays are based on fictitious numbers. I mean, when a patient 
has to pay 500 percent for this one drug I cited of the amount 
the doctor is having to pay for that drug as a copay, I mean, 
citizens look at that and say, you know, that's Alice in 
Wonderland. It's just crazy. Shouldn't the copay be based upon 
the real cost of the drug to the doctor, and what would it take 
to do that?
    Mr. Scully. Well, that may be--that gets into the delicate 
difference, as I said. But we can probably figure out exactly 
what we should be paying the manufacturers and recoup it, much 
the way Medicaid does through a reconciliation.
    The issue is, if you're trying not to squeeze, the 
physician is trying to buy it out in the market at the 
beginning of the year. Finding out what--the right number to 
charge the 20 percent copay against is one the tougher things 
to figure out.
    Chairman Tauzin. It is not hard to figure out. You simply 
have a provision that says you can't charge the doctor or 
physician as a co-pay more than 20 percent of the drug----
    Mr. Brown. Will you be able to do that administratively, 
the chairman's suggestion, simply so that the patient would pay 
the 20 percent of what the actual charge, what the doctor's 
actually charging for the drug? Could you do that?
    Mr. Scully. Well, the closest thing we have right now, the 
ability to actually determine what the actual price paid is, is 
the average manufacturer's price which we have for the purposes 
of Medicaid the worst----
    Chairman Tauzin. Let me say it again. If the law said that 
the doctor can't charge the patient more than 20 percent of the 
actual cost, it is the health care provider's obligation then 
not to send a bill that is represented on 20 percent of some 
fictitious price, he's got to look at what he has actually paid 
and send a bill based on 20 percent of what he really paid for 
the drug. Otherwise he is in violation. That is pretty stiff, 
but what is wrong logically with that if at the same time we 
are making the proper adjustments for practice reimbursement to 
the physician?
    Mr. Scully. Nothing. It seems logical, and I think the 
question from Mr. Brown was can we do it now administratively 
and I don't think we can.
    Chairman Tauzin. Also doing it administratively without 
correcting the reimbursement on the fund is disjointed. I 
understand that. There is a $177 million hit for health care 
providers. But the fairness of asking a Medicare patient to pay 
20 percent of a price that is totally fictitious, way in excess 
of what the physician actually bought that drug for, seems to 
me to be absolutely insane. It contradicts what we did in the 
Medicare program, which was literally to provide a co-pay 
requirement on the patient that was supposed to be one-fifth of 
the actual cost and, because of this crazy system of average 
wholesale pricing, can run as high as 500 percent of the cost. 
And I mean not only is it unfair basically to think about that 
but think about it in terms of if you happen to be the wrong 
patient, you happen to need that drug that is 500 percent as 
opposed to another patient that is paying closer to the real 20 
percent. There is an inequity in the requirements under the 
Medicare system depending upon how unlucky you are, what 
disease you have got, what drug you need to help you.
    I would think that we should all look at expediting a cure 
for that particular problem. Perhaps we can do that sooner than 
later.
    Mr. Scully. We would love it. We are totally with you. I 
think the best thing about this hearing was for the health care 
policy wonks in the world, many on your committee, this issue 
has been around about 10 years and I never heard this thorough 
a discussion on it, and usually what happens is somebody tries 
to cut a rate and somebody screams that patients are going to 
be hurt, which is frequently not the case, and we are 
legislatively prohibited from fixing it.
    Chairman Tauzin. You said the right thing, legislatively 
prohibited from fixing it, and that can't stand any longer. It 
is our obligation right here to fix it. We have allowed this to 
exist too long, as we thoroughly understand it, as we 
understand its pernicious effects upon the health care system, 
and particularly upon the very people it is designed to help, 
we have got to fix it, and if there are legislative impediments 
to your fixing it, we need to take them out of the way.
    Thank you very much. I will recognize Mr. Ganske for 5 
minutes.
    Mr. Ganske. Thank you, Mr. Chairman. I want to follow up on 
your line of questioning. It seems to me that the problem with 
instituting a limit on the co-pay to the actual cost without 
doing the rest is just what we have been talking about multiple 
times this morning; that is, that you are not taking into 
account the overhead involved with the administration, with the 
storage, with the ordering, with the time involved for 
personnel and things like that, and so I think that that issue 
of the co-pay is corrected when you actually have the 
inaccurate index of the cost, I mean of the drug, whether it's 
an AVP, or whatever letters you want to use.
    Mr. Scully, I want to go to this issue of the AMP data. 
This is a quote from the IG report. ``This option would require 
legislation to allow Medicare access to AMP data. Prior to this 
option being implemented, it would be useful to clarify or 
refine certain definitions. We also believe that an initial 
intensive effort should be made to audit AMP data.'' We don't 
want to just substitute some letters. We need to have some 
accuracy. Do you have any idea of what the definitions that we 
would need to address to clarify and define what the IG is 
talking about in terms of AMP?
    Mr. Scully. That is considerably lower and I think it 
generally works. It is confined to Medicaid by statute, and our 
Medicaid staff has access to what the Medicare staff does not. 
It is audited. If we use it for a broader chunk of the market 
and used it for Medicare as well as Medicaid, obviously 
incentives for people reporting their prices would--we'd have 
to probably audit more carefully, as the IG said, and be much 
more thorough in making sure the prices are accurate. But the 
idea of AMP, which is similar to an average sales price 
concept, is to actually find out what the manufacturer sells it 
to all customers in the country in any particular year and then 
come back and make it that that is the average price that we 
pay. I think the data is there now to make it work, and it is 
certainly the best measure to make it work.
    The problem is if you go out to many areas of the country 
where physicians and oncologists may actually have to pay more 
for it, there may be places where somebody can't get access to 
that. That was the argument about paying 85 percent of AMP back 
in 1991. If a physician in Iowa, for instance, couldn't get 
access to the drug for that price, he might never get it. So 
some have suggested that just consensually what we would do is 
allow the companies charge whatever they want, but then at the 
end of the year come back and reconcile, similar to what 
Medicaid does now, and say you sold us a million units of the 
drug times whatever the average manufacturer's average sales 
price is, you owe us the difference. That way you keep access 
to the physician out there buying in the market while actually 
recovering from the manufacturer.
    The problem with that, which is what I was trying to get to 
Mr. Brown, is then what do you do up front as far as charging 
20 percent of what, the inflated AMP or the real end of the 
year price the government ends up paying, and that is 
difficult.
    All things I think we can talk about fixing legislatively, 
but it is a complicated problem to make sure we don't overpay, 
but that we also don't shut off access to physicians who may 
not in some parts of the country be able to get access to the 
drugs. So it is a complicated problem. I think we can fix it, 
but I have only been looking at it intensively the last 2 or 3 
days and I can't tell you all the answers yet.
    Mr. Ganske. Can this committee expect from the 
administration and from you and CMS some specific suggestions 
for instance on the, quote, clarification and refinement of 
certain definitions, unquote, that we would need to do 
legislatively if we were looking at going the AMP route?
    Mr. Scully. Sure. Obviously we are hoping, and if we are 
only here for a month to spend a lot of time on legislative 
issues, we certainly have a lot of suggestions in this area. We 
have already spent a lot of time talking to committee staff.
    Mr. Ganske. We are dealing with 24 drugs; is that right?
    Mr. Scully. I think the bulk of the 24 is about 90 percent.
    Mr. Ganske. It would seem to me that we ought to be able to 
get a handle through sampling of real invoices on 24 drugs, 
what the real average wholesale price, or the AMP, should be to 
address this.
    Mr. Scully. Actually the companies that report AMP are 
required to tell us what their average price was to all their 
buyers in the course of the year in any category, and we audit 
that. So it should be a pretty accurate number. We just can't 
use it right now for Medicare.
    Mr. Ganske. How do you audit that?
    Mr. Scully. I believe the IG--the Medicaid actually goes 
into the companies and audits----
    Mr. Ganske. It goes into the company books and then 
checks----
    Mr. Scully. That is right. It is the OIG who actually does 
it for us.
    Mr. Ganske. And then checks back with the customers of 
those companies to see whether that in fact----
    Mr. Scully. Yeah. The only potential flaw I have seen is 
that some drugs, once you put Medicare and Medicaid together, 
it is--you know, to figure out what the rest of the market is 
paying and piggyback on that. A few of these drugs, the market 
is mostly Medicare and Medicaid. So it is a little difficult to 
figure out the prices if the non-Medicaid/Medicare market is 10 
percent. That is the only flaw I have seen so far in looking at 
it.
    Mr. Ganske. We both know it has been difficult to get 
accurate indices of practice expense. There has been a lot of 
controversy in those areas. If we are talking about changing 
this reimbursement, what will be the process to get an accurate 
assessment from these medical specialties that will be 
affected?
    Mr. Scully. I believe, and again I hope somebody will jump 
in here if I am wrong, all the specialties already have the 
ability to put in their own surveys. The oncologists could have 
put in their own practice survey and did not. The data that we 
had on oncology combined their actual drug costs so close to 
their practice expense costs that we made the decision, which I 
believe GAO agreed with, that we couldn't use that data. So we 
used the average physician's practice expense. I think that was 
defensible because arguably the physicians are already, from 
what we have heard today, being overcompensated on the drug 
side; so using the average physicians practice expense is 
reasonable.
    If you in fact reduce the AVP and you made the judgment 
that we should go back in and do a survey of oncology data or 
have them submit their own, we believe that would result in 
their practice expenses going up, but right now the practice 
expense component for oncologists is the actual average 
practice expense for all physicians because we don't use 
oncology specific data.
    Mr. Ganske. We have testimony today from Dr. Norton to the 
effect that the Medicare payment for services for 
administration may be one quarter what the actual costs are. Do 
you have a feeling for that?
    Mr. Scully. I have not, to be honest with you, looked at 
that level of detail. Totally independent of each other, both 
the GAO and our staff looked at this number and came up with a 
remarkably close initial determination. So I am happy to go 
back and spend time with the oncologists discussing it, I am 
sure I will if you are looking at legislation, but I have yet 
to find a physician group that was not unhappy with their 
practice expense allocation. I think that is the nature of the 
beast.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman, Mr. Norwood, for 5 minutes.
    Mr. Norwood. I thank the chairman and I only have one 
question. I am curious to see what Mr. Scully has to say. You 
implied earlier there seems to have been a problem at least as 
far as 10 years back, that HCFA has been concerned and has 
raised questions about this for a long time, however generally 
when you raised questions very loud and stuck your head up very 
far, Congress pounced on you. Is that where we have been?
    Mr. Scully. That is fair, but sometimes in fairness it is 
Congress, sometimes it is, you know, groups coming in and 
screaming within your own administration, whether it is--Gail 
Walinsky was the first person to get involved in this in 1991 
and I was in the White House then, and I remember not knowing 
very much about it but I remember we got a lot of heat for it. 
I think the level of understanding and interest this year is an 
all-time high and that is positive. I think generally whether 
it is Congress or just people complaining about it, when you 
have talk about cutting, the groups that are affected are 
always upset, and generally they are upset because in the past 
the issue has generally been lowering reimbursements without 
being sensitive to the fact that maybe there is an 
unfortunate--but reality is cautious. As I mentioned, I know 
for ESRD clinics, they argue that their rates are too low as 
well and that they rely on AVP transfers and cost shifts. 
Generally the answer in the past has been cut the rates and 
don't be sensitive to the other side, which does not seem to be 
the case this year.
    Mr. Norwood. My question, Mr. Scully, though, is since this 
has been a problem for a long time, I am a little bit surprised 
that why would not CMS or GAO or somebody be coming to this 
hearing today with a solution?
    Mr. Scully. It is not an easy solution. I spent 4 hours the 
other day with probably 10 people at CMS that have worked on 
this for the longest time and went around with the options I 
put in front of you today briefly, and I am not sure we have a 
consensus in our agency about what is right. We are going to 
have to pick one. I think it will be a hybrid of a bunch of 
these, but I am not sure that you could find a consensus 
solution anywhere. I would be happy to sit down with the 
committee and give you my opinions.
    Mr. Norwood. I was struck by the different options that you 
sort of threw at us pretty quickly, and I guess is this not 
solvable?
    Mr. Scully. I think it is very solvable. I think there are 
shortcomings to every solution and some benefits to every 
solution, and some people are not troubled by just saying let 
us pay the Federal Supply Schedule. I don't think that that--
which the VA pays, which the Coast Guard and other agencies 
pay. I think that probably causes significant access problems 
for some physicians in some places. So there are pros and cons 
to every option and, if you would like, I would be happy to 
share my staff paper on the pros and cons with you.
    Mr. Norwood. I think my feeling is this, the Energy and 
Commerce Committee is going to do something about this one 
which way or the other and it certainly should be and is our 
responsibility, but I also think it is the responsibility of 
the Federal agency to also come up with a solution. It doesn't 
necessarily mean we will adopt that. It doesn't mean that that 
will be the final solution. But I think you need to lead your 
organization to the plate, get up to bat, let us hear what you 
want to do. And at the same time our chairman, all of them 
along the line are going to be doing the same thing. But I am 
not sure I feel like we, the members of this committee have--
should have had the experience dealing with this problem for 10 
years at the same level as your agency has had experience 
dealing with this problem, and I am suggesting that you have 
some responsibility in my mind to not give us a dart board and 
hope we hit the right one. Come in here and say what you want 
to do.
    Mr. Scully. Mr. Norwood, I almost have never been accused 
of not having strong opinions about things for better or worse. 
The problem is that we are legislatively prohibited at least 
until today from considering this. So there is not an 
administration position. As I have----
    Mr. Norwood. Are you prohibited from coming up with a 
solution?
    Mr. Scully. No. But the fact is we have an administration 
with a White House and the Secretary--I have talked to the 
Secretary a little bit about it. I am not sure that the White 
House is aware of this. I can't state the administration's 
position publicly today. I have opinions. I will talk in the 
next week or so with people in the administration, and I have 
no doubt we will have a strongly held administration position. 
I am just not in a position today to go any further than I 
have.
    Mr. Norwood. I didn't expect today for you to come up with 
a solution. I expected for you to turn to some of that staff 
that has been over there over the last 10 years and I presume 
are working on this. At some point in time the agency itself 
should make a recommendation as to how they think we would best 
solve this problem and hopefully this committee and the 
subcommittees and full committee will go along with that, maybe 
alter that, maybe change that. But you need to have a position.
    Mr. Scully. I hope we can come up with a joint position 
with the committee, and we will give you lots of technical 
input, and whatever the committee decides I have a feeling will 
be the administration's position as well and we will hopefully 
do it together aggressively and on a bipartisan basis.
    Mr. Norwood. Thank you, Mr. Chairman.
    Mr. Greenwood. The time for the gentleman has expired. Let 
me comment that in fairness to everyone, we have all been on 
hold until the GAO study came out, which has been released 
today, and we now feel that we have a solid footing upon which 
to build our solution. The wholesale acquisition costs will 
almost certainly be the basis for the new reimbursement rates, 
will take care of the oncologists and others based on the data 
that we have now, and I think we will be prepared to work with 
CMS over the next couple of weeks and have a firm detailed 
legislative product in short order.
    Mr. Scully, thank you for your excellent testimony. Thank 
you for your patience and you are excused. Look forward to 
working with you.
    I call now the third and final panel: Dr. Larry Norton, 
President of the American Society of Clinical Oncologists; Mr. 
Kevin Martyn, Executive Director of Care for Life; Mr. Thomas 
Connaughton, President of American Association of Homecare; and 
Dr. Ezekiel Emanuel, Chief, Clinical Bioethics Department, 
Warren G. National Magnuson Clinical Center, National 
Institutes of Health. Welcome. We thank you for your patience 
in waiting all morning and all afternoon to testify, but we are 
glad to have you with us.
    As you probably heard me say to the previous witnesses, 
this is a joint committee hearing between the Health 
Subcommittee as well as the Oversight and Investigation 
Subcommittee, and when the Oversight and Investigation 
Subcommittee is involved, we take testimony under oath. Do any 
of you object to providing your testimony under oath?
    Seeing no such objection, I would inform you that you are 
entitled under the rules of this committee and under the rules 
of the House to be represented by counsel. Do any of you desire 
to be represented by counsel? Seeing no such desire, if you 
will rise I will give you the oath.
    [Witnesses Sworn.]
    Mr. Greenwood. Thank you. You are each under oath now, and 
we will begin with you, Dr. Norton. You are recognized for 5 
minutes for your testimony. Make sure your button is----
    Dr. Norton. Am I on?
    Mr. Greenwood. Yes.

   TESTIMONY OF LARRY NORTON, PRESIDENT, AMERICAN SOCIETY OF 
 CLINICAL ONCOLOGISTS; KEVIN MARTYN, EXECUTIVE DIRECTOR, CARE 
     FOR LIFE; THOMAS A. CONNAUGHTON, PRESIDENT, AMERICAN 
   ASSOCIATION OF HOMECARE; JoANN LAMPHERE, LEWIN GROUP; AND 
 EZEKIEL EMANUEL, CHIEF, CLINICAL BIOETHICS DEPARTMENT, WARREN 
   G. MAGNUSON CLINICAL CENTER, NATIONAL INSTITUTES OF HEALTH

    Mr. Norton. Hi, I am Larry Norton. Pleasure to be here. I 
am a physician, an oncologist, and this year I am President of 
the American Society of Clinical Oncology. I am also a New 
Yorker. So I don't have to belabor this. It has been a really 
rough couple of weeks, but I am delighted that you are having 
this hearing at this time because this is a topic of great 
urgency and importance to cancer doctors and cancer therapists 
in the United States.
    My organization represents cancer therapists, physicians, 
nurses, patient advocates, and others who take care of people 
with cancer and also people doing clinical research. I 
currently am also the head of Medical Oncology, called the 
Division of Solid Tumor Oncology, at Memorial Sloan-Kettering 
Cancer Center in New York. I have dedicated my life almost 30 
years to cancer treatments, largely chemotherapy treatments and 
largely for breast cancer, and it is of critical importance to 
me and my colleagues that the therapies that we develop that 
have been improving the life-span, cure rates, and the quality 
of life for our patients, that this can actually be delivered 
to our patients. So this is an issue of really critical 
importance to us.
    We agree that the system has to be fixed. We think that the 
payments for the drugs have to be aligned more closely to the 
actual costs, but we also think that the payments for the 
services that are rendered in the administration of these 
therapies have to be made more realistic, and we think this has 
to be done very carefully, has to be done jointly, or else we 
see the possibility of severe disruption to the care of our 
Medicare patients, and for this reason I underscore the urgency 
of this particular activity.
    We have made really significant progress in cancer therapy 
over the years. Many therapies that developed initially in the 
inpatient setting can now be given in the outpatient setting 
safely, the advances in treatment of nausea, advances in 
treatment of low blood cell counts, and many other improvements 
as well as the therapies themselves that have made such a 
difference. Therapies that used to require inpatient 
administration not that long ago can now be given--complex 
skill requiring therapies can now be given routinely in 
doctors' offices and this is more than just a convenience. This 
is an essential contributor to the quality of life as well as 
the length of life for our patients. We want to be sure 
whatever happens, whatever you decide to do and however you go 
about this, that the net result must be that doctors will be 
able to give chemotherapy to their patients in their offices. 
We calculate that about 70 percent of chemotherapy treatments 
are given in doctors' offices right now. If the payments, the 
total payments, for these therapies are not adequate, doctors 
will not be able to afford to do it. Some people said then they 
will refer them to hospitals or cancer centers. Cancer centers 
could be very far away from the patient in many parts of the 
country, and I don't know any cancer center that can handle a 
large influx of patients in this particular setting, certainly 
not my own.
    I am in charge of the Outpatient Breast Center of Memorial 
Sloan-Kettering Cancer Center and if we had a sudden influx of 
cancer patients with--breast cancer patients in the community 
for us to treat, we just couldn't handle it. So I don't think 
that is really a solution. Therefore, whatever we do if we 
don't do it carefully, we could see a real massive disruption 
in the system.
    So much of the discussion today is concerned with 
reimbursement for the drugs that are administered. We think the 
system does need to be fixed. There is no question about that, 
but I want to emphasize there has to be a simultaneous change 
in the reimbursement for the physician administering the 
therapy. Right now there is a gross underpayment, as everybody 
has acknowledged, and that the payments for drugs have to some 
degree compensated for that.
    If we don't reform the whole system at the same time, 
things are going to get thrown out of whack. It is like a car 
with a bad axle and a bad tire rim. You fix one. If you don't 
fix the other, you can't drive the car. I think that's exactly 
the situation that we find ourselves in. Medicare has 
determined this and I haven't heard anybody say this is not the 
case.
    I have a quote here that says Medicare payments for 
services related to provision of chemotherapy drugs are 
inadequate. We agree with this assessment. Actually our own 
calculations are that Medicare now pays for less than a quarter 
of the actual costs to the doctor in administering principal 
chemotherapy treatments. We think that part of this is the way 
that the--the methodology for calculating the payment amounts 
for services that do cost the doctor a lot but not directly 
furnished by the patient. In 1998, when Medicare adopted this 
particular methodology, it called its approach an interim 
approach, but it still hasn't been revised.
    We also feel there has to be a new type of Medicare payment 
for services that are directly related to administration of 
chemotherapy, directly related but right now not covered by any 
explicit reimbursement. There are many services that 
oncologists and their staff provide that are absolutely 
essential for taking care of these patients, such as social 
work, such as nutritional counseling, such as psychological 
support, and these are not really being covered. A big 
difference between oncology and the specialties is in other 
specialties an occasional patient has this requirement, for the 
oncologist essentially all the patients, and this has to be 
provided as an intrinsic part of the procedure.
    We believe that the costs of the chemotherapy 
administration has to be covered, but if it's just covered, 
then there is not going to be sufficient funds to provide these 
other critical services, and this has to be taken into account.
    Now, concerning the payment for the drugs themselves, we 
agree with pretty much everything that's been said. The AWP 
really overstates by varying amounts the amount, and clearly 
this is a big problem. We think this is not right. Mr. 
Chairman, you use the word ``outrageous,'' and I think it is a 
well chosen word. We actually have--we have proposals on the 
table. We have proposed a solution. It is in the form a white 
paper, and I would like to request that it be included in the 
record.
    Mr. Greenwood. The document will be included in the record.
    Mr. Norton. Thank you. And in that we talk about the 
surveys of the drug sellers to determine market prices or a 
correction in the actual published prices, and that's really 
what should be used to determine the reimbursement. But 
fundamentally we believe that if the cost is not covered, it's 
going to be impossible for the doctors to administer the 
therapy. Our job is to take the best possible care of our 
patients with cancer. It's a very hard job. I want to emphasize 
that. It's not just the intellectual challenges. The field is 
changing all the time. It's the psychological challenges, the 
emotional challenges, the spiritual challenges and I've got to 
tell you the hours are just unbelievable.
    We want to provide the very best care for our patients. We 
think that we need to have accurate reimbursements so we can do 
it financially. Anything that we do that is going to throw the 
system out of whack is going to hurt us from doing that. We are 
totally dedicated to quality cancer care and we want to work 
with Congress to make sure that the care we're now 
administering is provided at the highest possible quality 
level.
    Thank you very much.
    [The prepared statement of Larry Norton follows:]
  Prepared Statement of Larry Norton, President, American Society of 
                           Clinical Oncology
    My name is Larry Norton, President of the American Society of 
Clinical Oncology (ASCO). ASCO is the national organization 
representing physicians who specialize in clinical research and the 
treatment of cancer. ASCO has over 17,000 members, including 
nonphysician healthcare professionals and cancer specialists located 
abroad.
    I appreciate the opportunity to appear before the Committee today 
to present ASCO's views on the important subject of Medicare payment 
for the drugs and related services furnished in outpatient cancer 
treatment. ASCO agrees that Medicare payments for drugs and related 
services should be restructured to more closely align the payment 
amounts with the cost of providing cancer care. Payments for drugs 
should be reduced while payments for the related services should be 
increased. It is imperative that this be done carefully, however, to 
insure that delivery of treatment to Medicare beneficiaries is not 
disrupted.
                need to preserve outpatient chemotherapy
    I am Head of the Division of Solid Tumor Oncology at Memorial 
Sloan-Kettering Cancer Center in New York. As a specialist in the 
treatment of breast cancer, I am very familiar with chemotherapy and 
its importance in cancer treatment. Any reform of the Medicare payment 
system for chemotherapy must insure that cancer patients can continue 
to receive what they need to fight their disease. Chemotherapy is 
central to modern cancer treatment and is likely to be even more 
important in the coming years. Chemotherapy treatment was once 
considered far worse than the disease, requiring extensive hospital 
stays. Now, with better drugs to control side effects, patients can 
receive treatments in outpatient settings most convenient for them--and 
for their families. This is usually in physician offices.
    In restructuring the Medicare payment system for chemotherapy, the 
net result must be aggregate payment amounts that enable physicians to 
continue offering office-based chemotherapy. It has been estimated that 
70% or more of chemotherapy treatments are furnished in physician 
offices. If Medicare payments are not adequate to cover the costs of 
this service, physicians will be forced to have chemotherapy delivered 
in some other setting. It is far from clear, however, whether hospital 
outpatient departments have the capacity or the resources to handle a 
large inflow of chemotherapy patients. Any significant reduction in 
office-based chemotherapy could therefore result in a massive 
disruption in the care of Medicare patients with cancer.
                   payments for drug-related services
    As I stated above, ASCO supports a reduction in the Medicare 
payments for drugs. Before discussing that aspect, however, I want to 
speak first about the simultaneous change that must be made to insure 
that Medicare cancer patients will still be able to obtain chemotherapy 
treatment after the drug payments have been reduced. Under the current 
reimbursement system, the payments for drugs compensate for the 
underpayment or lack of payment for the related services, and all parts 
of the system must therefore be reformed at the same time.
    In the 1970s, there were few drug treatments available for cancer 
and, as I mentioned earlier, those that were available were generally 
administered to hospital inpatients. The few types of chemotherapy that 
were first furnished in the office setting were relatively simple, but 
they established the basis for the low Medicare payment levels for 
chemotherapy administration services that continue to exist today. 
There has been no major revision, even though the complexity of 
chemotherapy furnished in the outpatient setting has increased 
enormously. This problem was noted by Congress as early as 1987, when 
the Omnibus Budget and Reconciliation Act required the Department of 
Health and Human Services to conduct a study of the costs of furnishing 
chemotherapy in the office and assess whether payments are adequate. 
Unfortunately, this study was never conducted.
    Last year, however, the Health Care Financing Administration, now 
the Centers for Medicare & Medicaid Services (CMS), reviewed the matter 
and wrote Congress that ``Medicare payments for services related to the 
provision of chemotherapy drugs . . . are inadequate.''
    The inadequacy of the Medicare payment amounts is illustrated by 
the costs of one of the principal services. Under the physician fee 
schedule, the current Medicare payment level for the first hour of a 
chemotherapy infusion (CPT 96410) averages about $62. The cost of the 
supplies and equipment used in this procedure are estimated to be about 
$29, based on the 1994-95 prices used by CMS for these estimates. The 
salary and benefits of the oncology certified nurses who furnish 
chemotherapy are currently estimated by CMS to average about $35 an 
hour, and the total nurse time involved in furnishing an hour of 
infusion is estimated at about two hours. Among other elements, this 
work includes reviewing the patient's medical history, verifying the 
drug orders, preparing the drug, educating the patient, assembling the 
necessary supplies, administering the drug, documenting the procedure, 
and follow-up phone calls.
    Thus, the costs of the supplies, equipment, and nurse time for an 
infusion by themselves significantly exceed the Medicare payment 
amount. Moreover, there is nothing in the Medicare payment to cover the 
other costs of the office, including the administrative staff and the 
overhead, which CMS, using American Medical Association data, estimates 
to be about two-thirds of a physician's costs. The Medicare payment 
amount for chemotherapy services are far less than the costs incurred 
to furnish the services. ASCO estimates that Medicare pays less than 
one-fourth of the total costs of the principal chemotherapy procedures.
    ASCO believes that this underpayment results at least in part 
because of the way in which the methodology for the Medicare physician 
fee schedule sets payment amounts for services that may represent 
significant expense to a practice but are not directly furnished by the 
physician. Chemotherapy is one example. At the time CMS adopted this 
methodology in 1998, it characterized its approach as ``interim'' but 
the methodology has not yet been revised.
    ASCO believes that the payment amounts for services of this kind--
those that do not have a physician work component--should be based on 
information about the costs of providing those services, and not on the 
current ``top-down'' methodology that is used in general to set payment 
amounts. Although it would be desirable to collect new cost data, any 
restructuring in the near future must depend on information that 
currently exists or can be promptly developed. Consequently, ASCO 
recommends use of the data on costs that was initially developed by the 
Clinical Practice Expert Panels and has subsequently undergone review 
in the American Medical Association refinement process and analysis by 
CMS. Medicare should pay the full direct and indirect costs of 
chemotherapy services as estimated in that process.
    There should also be a new type of Medicare payment for services 
that are related to chemotherapy but are not part of the chemotherapy 
procedure itself. Oncologists and their professional staffs typically 
furnish a variety of services to cancer patients for which there is no 
explicit reimbursement. These services include the extensive support 
that seriously ill cancer patients frequently require, including social 
worker services, psychosocial services, and nutrition counseling. 
Social worker services encompass a variety of services intended to help 
patients carry out their therapy, such as help with insurance, 
arranging transportation to treatment, and filling prescriptions. 
Psychosocial support includes services such as counseling patients on 
their activities of daily living, support groups that meet in the 
physician's office, and grief counseling. In addition, physicians 
treating cancer patients perform an extraordinarily high amount of work 
outside the patient's presence, including family counseling, telephone 
calls, arranging for entry into clinical trials, and so forth. While 
other types of physician specialists may provide such services to 
occasional patients, oncologists and their staffs typically provide 
these services to the bulk of their entire patient load. If the 
Medicare payments for the drugs and drug administration are aligned 
closely with their costs, there will not be sufficient funds available 
to continue these services, which are so important to the seriously ill 
cancer patient population. Medicare patients need to continue to 
receive these services to deal with their disease, and the services 
should not be cut off to save money.
                           payments for drugs
    Finally, let me turn to the Medicare payments for the drugs 
themselves. The current Medicare payment amount for covered drugs is 
based on 95% of published average wholesale price (AWP). As is widely 
known, published AWP overstates, by a varying amount, the prices at 
which drugs can actually be purchased. This circumstance does not 
necessarily make AWP useless, however, and AWP is widely used by public 
and private insurance programs in their reimbursement methods for drugs 
that are dispensed by pharmacies or administered in physician offices.
    In recent years, the difference between AWP and actual prices for 
some drugs has become very large. This situation typically occurs for 
multiple-source drugs or drugs with close competitors, where 
competition forces down the actual price even though the list price, on 
which AWP is based, remains high. The large discrepancy between price 
and reimbursement amount for some drugs is not an appropriate 
situation.
    As part of restructuring the Medicare payment system, ASCO 
recommends one of two approaches to revising the payments for drugs. 
First, Medicare could determine the market prices of each drug. Instead 
of using AWP, the law could require drug wholesalers to report to a 
Medicare contractor the prices at which they sold each Medicare-covered 
drug, considering all discounts, and the quantity sold at that price. 
The contractor could then compile those reports into a picture of the 
range of market prices for each drug and set a Medicare payment level 
accordingly.
    If this market approach is adopted, ASCO believes that a number of 
features should be included to insure that the survey results in an 
appropriate payment level:

 The price reports should be frequent so that they reflect 
        changing market conditions. ASCO recommends that the 
        wholesalers submit reports every month and that the contractor 
        process the data promptly so that it can be used for 
        reimbursement purposes in the second following month. For 
        example, prices of drugs sold in January would be used to set 
        the payment amounts for March.
 Since there will be a variation in the prices, the Medicare 
        payment level for each drug should be set at an amount that 
        will cover the prices actually paid by the vast majority of 
        physicians. ASCO recommends the 95th percentile. Prices 
        actually paid may vary greatly because physicians in larger 
        groups are able to negotiate lower prices based on their volume 
        purchases. It would be extremely unfair to pay based on the 
        median price or some similar price because that would 
        systematically discriminate against physicians who are unable 
        to negotiate lower prices. Oncologists who are routinely 
        reimbursed less than what they pay for a drug would be unable 
        to continue furnishing drugs to their patients.
 The payment methodology should be flexible enough to take 
        known manufacturer price increases into account immediately. 
        For example, if data on wholesale prices is collected during 
        January for use in March, but the manufacturer raises the price 
        of a drug by 5% on February 1, that should be taken into 
        account in setting the March payment amounts.
 There should be an add-on amount to reflect certain costs 
        associated with use of the drug. These include costs such as 
        spillage, wastage, the opportunity cost of the capital tied up 
        in drug inventory, procurement and storage costs, and unpaid 
        patient coinsurance (bad debt). Although Medicare Part B does 
        not ordinarily cover bad debt, bad debt here represents an out-
        of-pocket loss to the physician and should be treated 
        specially. The various components of these extra costs are 
        difficult to estimate, so ASCO recommends a flat 10% add-on to 
        cover them.
 Sometimes physicians will encounter especially high prices for 
        drugs, such as if they have to purchase a drug from a pharmacy 
        in an emergency. The system should always allow a physician to 
        be reimbursed for the actual acquisition cost by submitting 
        documentation as to the purchase price.
 In states that impose a sales or gross receipts tax on 
        physician-administered drugs, Medicare should also cover that 
        amount so as to keep the physician financially whole.
    An alternative approach to using a survey of market prices would be 
to make the published prices used by Medicare more accurate. The main 
concern expressed about the published prices has been the particularly 
large differences between the published prices and actual prices for 
some drugs. The law could be changed to require manufacturers to submit 
accurate prices to the publishers. This approach would have the 
advantage of not requiring a government contractor to compile data.
    ASCO could support either of these approaches and we would be happy 
to work with Congress to develop the details of an appropriate 
methodology. Our concern is only that the resulting Medicare payment 
must be adequate to cover the full costs incurred by oncologists. 
Oncologists pay varying amounts for drugs, with large practices and 
entities able to obtain volume discounts not available to everyone. The 
methodology adopted must be adequate to insure that all oncology 
practices, regardless of size, obtain full reimbursement of all their 
drug-related costs.
                    hospital outpatient departments
    The Medicare statute ties payments under the hospital outpatient 
prospective payment system to AWP by paying for drugs used in cancer 
therapy based on 95% of AWP for a two to three year transitional 
period. As the payment methodology for drugs furnished in physician 
offices is revised, it is important that possible effects on payments 
for services in hospital outpatient departments be kept in mind. 
Hospital outpatient departments are an essential part of the delivery 
system for cancer care, and Medicare payments must be adequate to 
support their continued operation.
                               conclusion
    In summary, ASCO supports restructuring Medicare payments for 
chemotherapy related services by reducing the payments for drugs and 
appropriately increasing the payments for related services. It is 
essential that the cumulative payments after this restructuring fully 
cover the costs of the items and services that oncologists furnish to 
cancer patients. If their costs are not covered, oncologists will be 
unable to continue furnishing chemotherapy in their offices, and the 
result could be extreme disruption of the cancer care delivery system.
    Oncologists have dedicated their professional lives to treating 
patients with cancer, and our only objective here is to insure that our 
patients can continue to receive the therapy and services that they 
need in the setting that is most convenient and accessible. We believe 
that Medicare payments can be restructured without adverse consequences 
if our recommendations are adopted, and we look forward to continued 
work with the Congress toward that end.

    Mr. Greenwood. Thank you very much, Dr. Norton. We 
appreciate your testimony. And now, Mr. Martyn, you are 
recognized for 5 minutes.

                    TESTIMONY OF KEVIN MARTYN

    Mr. Martyn. Thank you, Mr. Chairman and members of the 
committee, for allowing me the opportunity to testify today. 
This hearing addresses a subject that has a potential to impact 
directly the quality of care that our patients receive, and I 
would ask that the prepared testimony that I have submitted be 
included for the record.
    I am the Executive Director of Care for Life, which is a 
pharmacy and home health care provider. We provide blood 
clotting factor products and related services and support the 
persons diagnosed with hemophilia who self-infuse at home. The 
ability of our patients to treat their conditions by self-
infusing at home instead of being treated in a hospital 
emergency room or treatment center allows individuals suffering 
from this condition to lead more normal, healthy and productive 
lives. We believe that home infusion also saves the government 
money.
    Mr. Chairman, as a health care provider who has served the 
hemophilia community for many years, I very much appreciate 
this committee's concerns over the high cost of medications and 
providing care. I am aware that there has been considerable 
criticism for paying providers based on the average wholesale 
price, and I would agree that the AWP may not be the right 
mechanism for all parts of the Medicare program.
    Having said that, Care for Life experienced firsthand last 
year what happened when AWP was reduced without adequate 
consideration for the impact on patient care. When AWP was 
suddenly lowered for blood clotting products, my company faced 
the difficult task of telling some patients that we could no 
longer provide care. We delayed this decision in every case for 
several months while operating at a loss, but as a business we 
cannot do that for long. Fortunately, in all but a handful of 
cases the State Medicaid directors decided to switch back to 
the previous accepted AWP levels or made modifications to their 
reimbursement level accordingly, and we were able to continue 
to provide care.
    At least with respect to disease that we treat, the current 
payment mechanism has resulted in good care at a fair price. I 
would like to describe briefly how we arrived at this system, 
the system that at least for hemophilia works quite well.
    Mr. Chairman, many years ago the primary way for 
hemophiliacs to receive care was to go to a hospital emergency 
room. There the doctor would examine them and continue to 
infuse and to notify the patient that they were having a 
bleeding episode, and of course in this diseased state many 
patients are aware previous to that of that situation. They 
would then be admitted, given an IV, or infusion, and then 
released.
    Eventually policymakers, the health care industry, and the 
hemophilia community realized it would be just as effective 
medically to encourage a shift to self-infusion at home and 
that doing so would in many cases be better for patients. Home 
infusion is better because patients begin to infuse sooner, 
which stops the bleeding faster, thereby decreasing likelihood 
of greater damage. In addition, Medicare and Medicaid pay 
dramatically less than if a patient had to go to the hospital 
for treatment.
    The idea worked and today Medicare and Medicaid enjoy very 
significant cost savings from home infusion. For example, 
according to a study published in the Journal of Care 
Management in June 1998, treating a minor bleeding incident at 
home cost $4,400 less than treating the same incident at the 
hospital. If only one-third of the hemophilia population 
experiences 10 minor bleeds for which they are needlessly 
required to visit the emergency room for treatment, the 
additional cost would be upward of $44,000 per person for minor 
incidents per annum. Multiplying that by 8,000, roughly one-
third of the hemophilia population, that total cost of 
government could be as high as an additional $352 million 
annually. For severe hemophiliacs the additional cost of 
emergency room treatment would be much higher, more than 
$100,000 per year. These additional costs do not include those 
costs associated with treating the increased physical injuries 
hemophiliacs suffer from the delay involved in having to make a 
trip to the emergency room.
    In addition to the health benefits, self-infusion at home 
reduces administrative cost. For the service we provide the 
Federal Medicare program only makes one payment under Part B. 
With the reimbursement based on AWP, Care for Life performs all 
the services associated with providing the clotting factor. 
These services include having pharmacists on staff to dispense 
and track drug interactions, nurses, administrative personnel, 
shipping, storage, training, supplies, and the cost of 
advancing the money used for purchasing the clotting factor. 
Care for Life, like many of the providers upon which Medicare 
relies, is a for-profit enterprise. Just like any other 
business we must make a reasonable profit margin or investors 
will put their money elsewhere. After taxes we make roughly 7 
percent, which I believe is a reasonable return.
    If the reimbursement mechanism were changed so that the 
reimbursement was substantially decreased, providers like Care 
for Life would be forced to send patients back to the hospital. 
That in turn would ultimately lead to increased costs to the 
Medicare and Medicaid programs and the decrease in quality of 
care received by individuals with hemophilia. It is an outcome 
that I am confident this committee will work to avoid.
    Again, I thank you for holding this hearing and for giving 
me the opportunity to testify. I share in your concerns, and I 
applaud your efforts to develop a reasonable approach to 
Medicare reimbursement, and I will welcome any questions you 
might have.
    [The prepared statement of Kevin Martyn follows:]
      Prepared Statement of Kevin Martyn, President, Care For Life
    Chairman Bilirakis, Chairman Greenwood, Members of the Committee, 
good morning. My name is Kevin Martyn. I would like to thank you for 
the opportunity to testify today. This hearing addresses a subject that 
has the potential to impact directly the quality of care that our 
patients receive. I would ask that the prepared testimony that I have 
submitted be included in the record.
    I am the President of Care For Life. Care For Life is a pharmacy 
and home health care provider. We provide blood clotting factor 
products and all related services and support to persons with 
hemophilia who self-infuse at home. The ability of patients to treat 
their condition by self-infusing at home--instead of being treated in a 
hospital emergency room or treatment center--allows individuals 
suffering from this condition to lead more normal, healthy, and 
productive lives. Home infusion also saves the government money.
    Mr. Chairman, as a health care provider who has served the 
hemophilia community for many years, I very much appreciate this 
Committee's concerns over the high cost of providing care. I am aware 
that there has been considerable criticism of paying providers based on 
the average wholesale price, or AWP, and I would agree that AWP may not 
be the right mechanism for all parts of the Medicare program. Having 
said that, Care For Life experienced first hand last year what happened 
when AWP was reduced without adequate consideration for the impact on 
patient care. When AWP was suddenly lowered for blood clotting 
products, my company faced the difficult task of telling some patients 
that we could no longer provide care. We delayed this decision in every 
case by several months by operating at a loss. But as a business we 
could not do that for long. Fortunately, in all but a handful of cases 
the state Medicaid directors decided to switch back to the old AWP 
levels, and we were able to continue to provide care. At least with 
respect to the disease that we treat, the current payment mechanism has 
resulted in good care at a fair price. I would like to describe very 
briefly how we arrived at this system--a system that, at least for 
hemophilia, works quite well.
    Mr. Chairman, many years ago the primary way that hemophiliacs 
received care when they were having a bleeding episode was to go to a 
hospital emergency room. There, a doctor would examine them and tell 
them what they already knew: they were having a bleeding episode and 
needed an infusion of clotting factor to stop the bleed. The patient 
would be admitted, hooked up to an IV, given an infusion, then 
released. Eventually, policymakers, the health care industry, and the 
hemophilia community realized that it would be just as effective 
medically to encourage a shift to self-infusion at home, and that doing 
so would in many cases be better for patients. Home infusion is better 
because patients begin to infuse sooner, which stops the bleeding 
faster, thereby decreasing the likelihood of greater damage. In 
addition, Medicare and Medicaid pay dramatically less than if the 
patient had to go to the hospital for treatment.
    The idea worked, and today Medicare and Medicaid enjoy very 
significant cost-savings from home infusion. For example, according to 
a study published in the Journal of Care Management in June of 1998, 
the cost to the government of treating a minor bleeding episode in an 
adult male who self-infuses at home is $1,186.
    Alternatively, if that patient had to make an emergency room visit 
to get treatment--for the same minor bleeding episode--the cost to the 
government would be $5,620. That is a difference of more than $4,400 
per incident, again, based on a minor bleeding episode.
    Light to moderate hemophiliacs may bleed around 12 times per year. 
Those with severe hemophilia may experience a bleed 52 times per year. 
The Centers for Disease Control and the national organizations 
representing the hemophilia community estimate there are 17,000 to 
30,000 hemophiliacs in the U.S. The reported numbers vary because not 
all hemophiliacs seek treatment at treatment centers that report to the 
CDC.
    Accordingly, if only one third (approximately 8,000) of the 
hemophilia population experiences 10 minor bleeds for which they are 
needlessly required to visit the emergency room for treatment, the 
additional cost to the government would be $44,000 per person for minor 
incidents in that year. The total additional cost to the government 
would be $352,000,000 annually.
    For severe hemophiliacs, the additional cost of emergency room 
treatment would be much higher, easily more than $100,000 annually per 
patient. These additional costs do not begin to address the increased 
physical injury hemophiliacs suffer from the delay involved in having 
to make a trip to the emergency room to get treatment or the additional 
costs involved in treating those increased injuries suffered as a 
result of the delay in receiving infusion treatments.
    In addition to the health benefits, self-infusion at home reduces 
administrative costs. With respect to providing clotting factors to 
hemophiliacs, the federal Medicare program only makes one payment under 
Medicare Part B. Under the statutory formula, the actual payment from 
Medicare equals 76% of the AWP for the clotting factor used. We get 76% 
of AWP because the law directs Medicare to pay 80% of the allowable 
cost, which is statutorily set at 95% of AWP. The provider must collect 
the other 20% of the 95% allowable cost--the co-pay--from either the 
patient, private insurance, or the state Medicaid program. In the case 
of Care For Life, roughly 90% of the time we are successful in 
collecting some portion of that 20% co-payment.
    With the reimbursement based on AWP, Care For Life performs all of 
the services associated with providing the clotting factor. These 
services include having pharmacists on staff to dispense and track drug 
interactions, nurses, administrative personnel, shipping, storage, 
training, supplies, and the cost of advancing the money used to 
purchase the clotting factor, to name a few.
    Care For Life, like many of the providers upon which the Medicare 
system relies, is a for-profit enterprise. Just like any other 
business, we must make a reasonable profit margin, or our investors 
will put their money elsewhere. After taxes, we are making roughly 7%, 
which I believe is a reasonable return. It is much less than the 
margins earned by some of the country's telecommunications companies, 
car companies, and entertainment companies, but enough so that it makes 
sense to be in this line of business.
    If the reimbursement mechanism were changed so that reimbursement 
was materially decreased, providers like Care For Life would be forced 
to send patients back to the hospital. That in turn would ultimately 
lead to increased cost to the Medicare and Medicaid programs, and a 
decrease in the quality of care received by individuals with 
hemophilia. That is an outcome that I am confident that this Committee 
will work to avoid.
    Again, I thank you for holding this hearing and for giving me an 
opportunity to testify. I share your concerns and I applaud your 
efforts to develop a reasoned approach to Medicare reimbursement. I 
welcome any questions that you may have.

    Mr. Greenwood. Thank you, Mr. Martyn. Mr. Connaughton for 5 
minutes.

               TESTIMONY OF THOMAS A. CONNAUGHTON

    Mr. Connaughton. Mr. Chairman, I am President of the 
American Association for Homecare. Our association includes the 
full spectrum of the home care industry, including providers of 
inhalation and infusion therapies in the home setting. Drugs 
provided in these therapies have been relevant to this hearing.
    I am accompanied by Dr. JoAnn Lamphere of the Lewin Group. 
At our request Lewin conducted a survey of companies offering 
inhalation and infusion therapies across the country to 
determine the costs of providing those therapies in the home. 
Dr. Lamphere will report on Lewin's analysis of this survey and 
after making a few general statements I will defer to her.
    I want to highlight that the pharmaceutical products used 
in inhalation and infusion therapies are not simply oral 
medications. In the case of respiratory medications these drugs 
must be utilized in conjunction with nebulizers. Infusion drug 
therapy involves primarily the administration of the drug into 
the body through a needle or catheter. These therapies cannot 
typically be administered without a complex array of services.
    There are some fundamental principles that are important to 
understand regarding home care and Medicare reimbursement for 
prescription drugs.
    First, our members provide these products in the home, 
which is significantly more cost effective than providing them 
in an institution.
    Second, the work of the home care provider begins with a 
prescription. The provider must furnish the drug prescribed by 
the physician and is not engaged in the selection of a 
particular product.
    Third, administering pharmaceuticals in the home setting 
involves a number of functions and services performed by the 
home care provider. These services include the preparation of 
patient specific sterile drugs, comprehensive training of 
patients and often their families, and clinical monitoring to 
prevent infections and other potentially life-threatening 
complications. Trained professionals are on call on a 24-hour 
basis. In most cases providing these services is more costly 
than the drug itself, as the Lewin report will underscore.
    Fourth, unlike managed care, which pays for a product plus 
services, the sole reimbursement under Medicare Part B for 
these products is for the drug itself. The difference between 
the reimbursement rate and the cost of the drug must cover all 
the services. Outside of a small dispensing fee for respiratory 
drugs, there is no fee schedule for our services, unlike the 
physicians schedule.
    Fifth, Medicare coverage for infusion therapies is very 
limited, and Medicare is losing the advantage of efficiencies 
provided in the home setting that the private sector is taking 
advantage of.
    Sixth, we have not been able to make a recommendation for 
replacement of the AWP system, and I am somewhat comforted that 
there has been a lot of questions from everyone who has come up 
here. It is very complex and there are so many variables. That 
is why we advise you to proceed with care. If, however, 
Congress revises the reimbursement system for Medicare Part B 
drugs, it should make certain that it provides for 
reimbursement of all the services and functions involved in 
providing these therapies in the home setting based on 
standards that are widely used in private sector. It should 
further expand the coverage of infusion therapies for Medicare 
beneficiaries.
    H.R. 2750, introduced by Mr. Engel and others earlier this 
year, addresses these issues in the context of infusion 
therapy. We believe this approach is equally appropriate for 
inhalation therapies.
    Dr. Lamphere?
    [The pepared statement of Thomas A. Connaughton follows:]
 Prepared Statement of Thomas A. Connaughton on Behalf of the American 
                        Association for Homecare
    Mr. Chairman, my name is Tom Connaughton. I am President of the 
American Association for Homecare (``AAHomecare''). Our Association was 
formed by the merger of three national associations on February 1, 
2000. We are the only national association that represents every line 
of service within the homecare community. Our members include providers 
and suppliers of home health services, durable medical equipment (DME) 
services and supplies, infusion and respiratory care services, and 
rehabilitative and assistive technologies, as well as manufacturers and 
state associations.
    We thank you for the opportunity to discuss the Medicare 
reimbursement system for pharmaceuticals administered to beneficiaries 
by homecare providers and suppliers, in particular, home infusion 
therapies and inhalation therapies administered to respiratory 
patients. Homecare providers and suppliers save Medicare money by 
treating patients in the most cost-effective setting--their homes. The 
savings generated by treating patients at home can be dramatically 
cost-effective when compared to the cost of the same therapy 
administered in an institutional setting.
    Joining me is JoAnn Lamphere (Dr.P.H.) of The Lewin Group. At the 
request of our association, The Lewin Group conducted a survey of 
providers and suppliers of inhalation and infusion therapies in order 
to determine the costs associated with these therapies. The Lewin Group 
has prepared a report analyzing the results of this survey. To our 
knowledge, it is the most definitive report on the subject to date. Dr. 
Lamphere will summarize the findings of that report and, of course, a 
complete copy is attached for your information.
    I want to begin by making an important distinction between infusion 
and inhalation therapies administered to patients in their homes and 
conventional outpatient drugs such as pills and ``patches.'' The key 
difference is that pills and patches do not require professional 
services to administer. An individual can consume a pill or apply a 
patch himself after obtaining it from a retail or ``traditional'' 
pharmacy. In contrast, infusion and inhalation therapies cannot be 
administered to patients at home without a complex array of 
professional services. These medications are provided only on the 
prescription of a physician and as required by regulatory, accrediting 
and pharmacy licensing bodies, are prepared in high-tech, sterile 
settings similar to those found in a hospital. These services ensure 
the safe and effective administration of infusion and inhalation 
therapy in the home.
    As we begin this discussion, it is also important to note that 
homecare providers and suppliers are not paid separately for these 
important services. Medicare does not have a separate benefit for these 
homecare therapies. Infusion and respiratory medications furnished to 
homecare patients are covered under the Medicare DME benefit. This 
means that the only items that are explicitly covered and reimbursed 
are the drugs, the equipment, and the supplies. Unlike other health 
care professionals, homecare providers and suppliers do not have a 
mechanism that reimburses the services necessary to administer the 
drugs in addition to the reimbursement for the drugs. By comparison, 
the private managed care sector has recognized the tremendous cost-
savings associated with homecare and it continues to provide coverage 
for a growing list of home infusion and inhalation therapies. Moreover, 
such organizations contract with providers for extended periods of 
time, guarantee tremendous volume, and structure their contracts with 
both a fee for the drug and a per diem to assist in covering the 
providers' costs of services.
                           inhalation therapy
    Inhalation therapy is administered to patients with respiratory 
disease, including, for example, chronic obstructive pulmonary disease 
(COPD). COPD is the fourth leading cause of death in the United States, 
affecting 16 million people.1 COPD includes a number of 
chronic respiratory diseases such as emphysema, chronic bronchitis, and 
asthma. Individuals with COPD have a progressive illness. The disease 
can be stabilized, but it cannot be cured. Inhalation therapy is used 
to manage COPD throughout the course of the disease, but in the more 
advanced stages of COPD, other therapeutic interventions may be 
required.
---------------------------------------------------------------------------
    \1\ See National Institutes of Health, Global Initiative For 
Chronic Obstructive Pulmonary Disease, April 2001; Agency for Health 
Care Quality Research Evidence Based Practice Guidelines, Management of 
Acute Exacerbations of Chronic Obstructive Pulmonary Disease.
---------------------------------------------------------------------------
    Specifically, inhalation therapy is the process through which a 
drug or a combination of drugs is delivered into the airways and 
inhaled directly into the lungs via a device called a nebulizer. These 
drugs may include beta-adrenergic bronchodilators, anticholinergic 
bronchodilators, mast cell stabilizers, anti-inflammatory steroids, 
antibiotics, and sputum liquefiers. Patients receiving inhalation 
therapy at home are monitored by respiratory therapists and highly 
trained pharmacists. Inhalation therapies reduce acute exacerbations of 
COPD, saving the Medicare program money in emergency room visits and 
inpatient stays.
                         infusion drug therapy
    Private sector insurance plans and private managed care plans 
increasingly have embraced home infusion drug therapy since the 1980's. 
Antibiotic therapy, chemotherapy, and pain management are among the 
spectrum of infusion therapies that are now commonly provided to 
patients in their homes. Currently, there are over twenty different 
drug therapies being offered in the home and other outpatient settings 
in the private sector. The private sector plans and payers typically 
recognize expressly and separately the professional services necessary 
to provide infusion drug therapy in a safe and effective manner in the 
home setting.
    Infusion drug therapy involves primarily the administration of the 
drug into the body through a needle or a catheter. Typically, infusion 
drug therapy means that a drug is administered intravenously, but it 
may also apply to situations where drugs are provided through other 
parenteral (non-oral) routes. Generally, infusion drug therapies are 
used only when less invasive means of drug administration are 
clinically unacceptable or less effective. A team of patient service 
representatives, clinical pharmacists, high tech infusion nurses, and 
delivery and reimbursement professionals support patients and their 
caregivers throughout their treatment. These services are inextricably 
linked to the therapies and are often mandated by accrediting bodies 
whose standards ensure quality delivered in an alternate site setting.
    Providing infusion therapies at home has several advantages over 
hospital-based therapy. Most patients prefer to receive such therapies 
at home rather than in the hospital or in a skilled nursing facility. 
Homecare therapy allows many patients to lead normal lives throughout 
the duration of the therapy; it enables terminally ill patients to 
spend valuable time with their families and loved ones. Also, the 
ability to administer these therapies in the home reduces the risk of 
hospital-acquired infections that are sometimes associated with 
prolonged in-patient stays. In most cases, the cost of infusion drug 
therapy when properly provided in the home is far less than the cost of 
such care in the hospital.
medicare coverage of home respiratory and infusion inhalation therapies
    It is important to note that Medicare covers very few of the 
infusion drug therapies when provided at home. Further, as I stated 
above, Medicare does not have a separate inhalation therapy benefit or 
a home infusion therapy benefit. Medicare coverage for these therapies 
in the home is found only under the DME benefit--but only when 
equipment such as a nebulizer or an infusion pump is necessary. The 
fact that coverage for these therapies is limited to the DME benefit is 
a very important point in understanding the homecare community's issues 
with drug reimbursement, because the DME benefit explicitly covers only 
the drugs, supplies, and equipment. There is no recognition of the 
professional services and other functions that are widely recognized as 
necessary to providing inhalation and infusion drug therapies in the 
home in a safe and effective manner.
    The Medicare program's lack of recognition of these professional 
services is illogical, potentially threatening to beneficiaries, and 
contrary both to how clinicians define and the private sector plans 
cover these therapies. The clinical value and necessity of the 
provision of professional services to deliver inhalation and infusion 
therapies is reflected in various accreditation standards commonly used 
by private sector payers, such as the standards established by the 
Joint Commission on Accreditation of Healthcare Organizations (JCAHO). 
Indeed, private payers pay for these services as a specific component 
of the benefit. The Lewin Group's analysis provides a good picture of 
the costs involved in providing such services.
    These therapies require specialized pharmacy services. Such 
services include the compounding of many of the drugs in a sterile 
setting, responding to emergencies and questions regarding therapy, and 
participating in the training and education of the patient (and often 
the patient's family). These therapies also require the services of a 
nurse or respiratory therapist to perform a variety of functions, 
including patient screening and assessment, patient training regarding 
administration of the pharmaceuticals, and general monitoring of the 
patient's health status. In the case of infusion therapy, these 
services also include care for the infusion site, and monitoring of the 
catheter exit site for signs of infection or other complications. In 
addition, the drug, supplies, and equipment are delivered to the 
patient's home often within four hours of the prescription. Patient 
satisfaction and other outcomes are measured and reported to 
accrediting organizations as part of quality improvement programs. 
Finally, staff, including licensed pharmacists, pharmacy technicians, 
respiratory therapists, and registered nurses, are on call 24 hours a 
day.
    It is important to underscore that none of the specialized pharmacy 
services is covered under any other Medicare benefit. In a minority of 
cases, Medicare home infusion patients may meet the ``homebound'' 
requirement and qualify for the home health benefit. In such instances, 
the nursing services described above would be covered under that 
benefit. For all other Medicare Infusion Patients, the nursing services 
are not covered by the home health benefit.
            average wholesale price and drug pricing issues
    Much has been said about how Medicare pays for the few outpatient 
drugs that are covered currently. The use of the average wholesale 
price (AWP) as the principal basis for determining reimbursement for 
drugs has received much criticism recently as being an inaccurate 
reflector of the physicians' and pharmacists' costs for these drugs. 
There is little question that these criticisms are correct--if the 
payment ``buys'' drugs only. In actual fact, the drug payment 
calculated on the basis of AWP has been used for far more than that. 
With regard to inhalation and infusion therapy in the home setting, the 
drug payment is the only available payment mechanism for needed 
functions that are essential to providing good quality care. In other 
words, the spread between the providers and suppliers' acquisition cost 
and the Medicare reimbursement under Medicare Part B must cover all 
functions and services. The acquisition cost of the drug is only a 
fraction of the overall cost of caring for these patients at home.
    The conclusions of the Lewin report, which Dr. Lamphere will 
explain in more detail, reinforce the point that the cost of the drugs 
represents only one small portion of the overall cost of caring for 
these patients in need of inhalation or infusion therapy. Indeed, the 
cost of goods represents 26% of total costs while direct patient care 
costs average 46% and indirect costs such as accreditation, information 
systems, and Medicare/Medicaid regulatory compliance amount to another 
25%.
    In the case of infusion therapies delivered to Medicare 
beneficiaries, providers, and suppliers, costs exceed the revenues 
received under Medicare. For respiratory medications, providers and 
suppliers report an average margin of 9.2% after taxes, which is 
considerably less than the average after tax margin of 14.4% reported 
by companies on the S&P index for the same time period in 2000.
    It is important to note that homecare providers are not engaged in 
the selection of a particular drug. Physicians prescribe exactly which 
drugs should be used. The services furnished by homecare providers and 
suppliers are triggered by the physician's prescription. Their jobs 
begin when they receive the physician's order.
    Policymakers simply cannot look at drug payment as an isolated 
issue, separate from the other workings of a particular therapy. 
Reducing drug payments dramatically, without corresponding changes in 
other aspects of the payment methodologies, would truly strain the 
ability of suppliers and providers to continue to provide these drug 
therapies to Medicare beneficiaries. Indeed, homecare providers and 
suppliers are in a far more tenuous position regarding drug 
reimbursement than are other providers because they receive no payment 
whatsoever for the important functions and services. Reimbursement for 
drug therapies delivered in the home is tied solely to the drug 
supplies and equipment. There is no fee schedule for services. These 
necessary professional services must be recognized, and they should be 
reimbursed.
    While we have analyzed the AWP system and possible alternatives, we 
have not been able to develop a recommendation for the Subcommittees 
for a system that accurately determines the cost of products to 
providers and suppliers. These costs vary so widely among providers and 
suppliers that it is difficult to conceive of a system that accurately 
accounts for all of these variables. Accordingly, we urge Congress to 
proceed with caution. However, if Congress contemplates changing the 
reimbursement system under Part B for drugs administered in the home, 
it is critical that it recognizes the services involved and provide a 
framework for reimbursing them. It is not an option, in our opinion, to 
limit payment and coverage strictly to what is covered under the DME 
benefit. If Medicare beneficiaries receive only what the DME benefit 
currently recognizes--the drug, supplies, and equipment (pump or 
nebulizer)--then the level of care for the Medicare beneficiaries will 
be far less than that commonly provided in the private sector. Indeed, 
there are questions whether there will be access for Medicare 
beneficiaries at all. That result would be neither fair nor clinically 
appropriate. Medicare beneficiaries often are less able to deal with 
the complexities of these technical homecare therapies than are people 
who are decades younger.
                            recommendations
    We believe that it is important to establish accurate definitions 
of home respiratory and infusion therapy, create quality standards 
based on those currently and widely used in the private sector, and 
establish a fee schedule that reflects all the covered components of 
the therapies. H.R. 2750, introduced earlier this year by Congressman 
Engel of New York, Congressman Rush of Illinois, Congressman Towns of 
New York, and Congresswoman Hart of Pennsylvania, would do exactly that 
for Medicare coverage of home infusion therapy. This bill would remove 
coverage of home infusion therapy from the DME benefit and establish a 
new benefit that accurately reflects how these therapies are and should 
be provided. If enacted, this bill will bring the Medicare program in-
line with the private sector as to how these therapies are covered and 
defined. We believe this approach is equally appropriate for inhalation 
therapies provided in the home if Congress revises the reimbursement 
system for Medicare Part B and drugs.
    Mr. Chairman, AAHomecare thanks you for the opportunity to present 
views on behalf of our member companies. Please do not hesitate to call 
upon us for additional information.

                  TESTIMONY OF JoANN LAMPHERE

    Ms. Lamphere. Mr. Chairman, my name is JoAnn Lamphere. 
Thank you for the opportunity to present key findings of the 
Lewin Group's study. The significance of this study is that it 
supplies the most current and extensive estimates of the cost 
of respiratory and infusion therapies and the cost of the 
services that accompany quality patient care to Medicare 
beneficiaries in the home.
    This past summer the Lewin Group surveyed 19 home pharmacy 
companies that served Medicare patients in all 50 States. A 
description of the study's analytic approach is in our report. 
Key findings of the study include pharmacy, nursing 
coordination, patient education, and other direct costs account 
for 46 percent of the total costs incurred by pharmacies 
providing respiratory and infusion therapies to Medicare 
patients. Medicare does not currently recognize these costs. 
The acquisition cost of the drug itself accounts for 26 
percent. Indirect costs and bad debt account for another 28 
percent. The distribution of direct patient costs varies by 
type of therapy. For respiratory therapy service costs equal 46 
percent. For home infusion service costs range from 40 percent 
for chemotherapy to 26 percent for antiinfectives. Pretax 
operating margins are 20.5 percent for respiratory and negative 
22.2 percent for home infusion services. The bottom line after-
tax Medicare margin is 9.1 percent, which represents the 
combined margin for respiratory and infusion therapies provided 
to Medicare patients by home care providers after corporate 
income tax and interest and depreciation are recognized.
    If we are to assure that Medicare beneficiaries across the 
United States have access to medically prescribed respiratory 
and infusion therapies in the home, these companies must 
continue to be financially viable.
    Mr. Chairman, thank you.
    [The prepared statement of JoAnn Lamphere follows:]
         Prepared Statement of JoAnn Lamphere, The Lewin Group
    Mr. Chairman. My name is JoAnn Lamphere, Dr.P.H. I am a Senior 
Manager in the Health Care Finance Practice of The Lewin Group. Thank 
you for the opportunity to present key findings of a study that The 
Lewin Group conducted for the American Association for Homecare. The 
purpose of this study was to determine the costs to providers 
associated with the clinical and support services offered to Medicare 
patients receiving respiratory and home infusion therapies in the home.
    The significance of this study is that it provides the most current 
and extensive estimates of the cost of respiratory and infusion 
medications and the cost of the associated services that accompany 
quality patient care. This information should be useful to you in the 
months ahead as you consider the adequacy of Part B payments for drugs 
and biologicals under the Medicare program.
    This past summer, The Lewin Group surveyed 19 home pharmacy 
providers. The sample was selected with the intent of representing 
homecare pharmacy companies nationwide. As a group, the sampled 
providers serve Medicare patients nationwide in all 50 states. The 
sampled companies range in size from less than $1 million to greater 
than $1 billion in annual net revenue. Sampled companies served 164,782 
respiratory and 2,400 home infusion Medicare patients in CY 2000.
    A chief financial officer (or designee) or head pharmacist from 
each participating company completed a mail-in survey; the information 
they provided was based on company financial records. The Lewin Group 
validated data submitted through follow-up telephone interviews and 
available secondary data sources. The information that respondents 
provided included Medicare revenues, acquisition cost of goods, cost of 
pharmacy operations and other direct patient care, and other major 
costs that accompany the provision of respiratory and home infusion 
therapies to Medicare patients in the home. (Respondents were directed 
to exclude any costs and revenues associated with skilled nursing 
services that are reimbursed through home health agency provisions of 
Medicare.) Respondents were asked to proportionally allocate specified 
Medicare service expenses based on the volume of Medicare patients they 
served.
    In a study such as this, it is important to assure that findings 
are not biased by a small sample size. To achieve this objective, a 
double weighting process was adopted. First the sample of homecare 
pharmacies was divided into two groups, large companies and small 
companies, based on volume of their respiratory and home infusion 
business. Revenues and costs were then pooled at the ``large'' and 
``small'' company levels and sampled companies' respiratory and home 
infusion service costs and margins were calculated from these numbers. 
Next, an additional set of weights was employed in order to ensure that 
calculations from the sample reflect the industry's distribution of 
large and small firms with respect to Medicare respiratory and home 
infusion services. Thus, the Lewin estimates of Medicare product and 
service costs for respiratory and home infusion therapies and Medicare 
operating margins were calculated in such a way that they are broadly 
representative of the homecare pharmacy industry as a whole.
    What was learned from this Lewin study? Our key findings include:

 Pharmacy operations, patient care and education, and other 
        direct costs account for 46 percent of the total cost incurred 
        by homecare pharmacies providing respiratory and home infusion 
        therapies to Medicare patients. The acquisition cost of the 
        goods themselves account for about 26 percent of the total 
        cost, on average.
 The distribution of costs for pharmacy operations, direct 
        patient care, and other services varies dramatically by type of 
        therapy. For respiratory therapy, service costs equal 46 
        percent of the total cost of providing respiratory services in 
        the home. For home infusion therapies, service costs range from 
        a high of 40.2 percent for chemotherapy and 38.7 percent for 
        pain therapy and management to 25.8 percent for anti-infectives 
        and 26.4 for inotropic therapy.
 Indirect costs, such as management systems, regulatory 
        compliance programs, field administration, and bad debt make up 
        the remaining 28 percent of home pharmacy costs.
 We analyzed pre-tax operating margins individually for 
        respiratory and infusion therapies. Pre-tax operating margins 
        are 20.5 percent for respiratory and -22.2 percent for home 
        infusion services. Combined, pre-tax operating margin for both 
        services is 20.4 percent.
 The bottom line after-tax margin for sampled companies is 9.1 
        percent. This 9.1 percent is the estimated combined margin for 
        respiratory and home infusion services provided to Medicare 
        patients by home pharmacy companies after federal and state 
        corporate income taxes, as well as interest and depreciation, 
        are recognized.
    Assuring quality patient care and meeting established patient 
quality care standards (e.g., accreditation, federal and state 
licensure and regulatory requirements, etc.) is an essential component 
of the service homecare pharmacy providers offer to all patients, 
regardless of whether Medicare reimbursement policies expressly 
recognize these services.
    Currently, Medicare Part B reimbursement for drug products offsets 
the costs of important patient services for which there is no direct 
Medicare payment. The financial realities of the health care 
marketplace that provides respiratory and infusion therapies to 
Medicare patients at home require a positive after-tax margin in order 
to attract equity capital for future operations. Thus, if we are to 
assure that Medicare beneficiaries across the United States have access 
to medically prescribed respiratory and home infusion therapies in the 
home, these companies must continue to be financially viable.
    Mr. Chairman. Thank you for the opportunity to present these 
findings from The Lewin Group's study. A copy of the full report, on 
which this testimony is based, is provided for your consideration.

    Mr. Greenwood. Thank you very much for your testimony. Dr. 
Emanuel for 5 minutes.

                  TESTIMONY OF EZEKIEL EMANUEL

    Mr. Emanuel. Thank you, Mr. Chairman and members of the 
subcommittee, for inviting me to testify. I am Ezekiel Emanuel, 
an oncologist and bioethicist, and I work at the NIH as the 
Chair of the Department of Bioethics. I also am Chairman of the 
American Society of Clinical Oncology's Task Force on Quality 
of Cancer Care.
    Let me start by saying what I am not. All my life I have 
worked in an academic setting at Dana-Farber Cancer Institute 
at the NIH, and I have never once billed Medicare for any 
chemotherapy I administer, so I know very little about AWP.
    The primary purpose of my testimony, however, is to talk to 
you about a study we conducted to look at the use of 
chemotherapy at the end of life. This is an area I've been 
interested in for about 15 years. As you know, there's 
widespread perception among the public that dying cancer 
patients receive too much chemotherapy. Conversely, my 
colleagues believe that dying patients and their families often 
demand chemotherapy and that they use chemotherapy judicially 
at the end of life to enhance quality of life and prolong life. 
Ironically, there is no data on this subject and it's never 
been looked at before. We looked at nearly 8,000 patients in 
Massachusetts who died of cancer. Let me just summarize six of 
our findings.
    First, in the last 6 months of life about 33 percent of 
patients who died of cancer received chemotherapy and almost a 
quarter of patients received chemotherapy in the last 3 months 
of their life.
    When we compared--second point, when we compared patients 
who had chemotherapy responsive tumors like breast cancer, 
colon cancer, ovarian cancer, with patients who had at that 
time chemotherapy unresponsive tumors, tumors that did not 
shrink with chemotherapy like pancreatic cancer or liver cancer 
or gall bladder cancer, we found no difference in the frequency 
with which the chemotherapy was given. So it was given as 
frequently to chemotherapy responsive tumors as chemotherapy 
unresponsive tumors.
    Third, dying patients who were younger were much more 
likely to get chemotherapy than older patients regardless of 
cancer type.
    Fourth, how long dying patients receive chemotherapy, 
however, differed very much by the type of cancer patients had, 
so that those patients who had chemotherapy unresponsive tumors 
like pancreatic cancer or liver cancer got chemotherapy for 
only one cycle whereas those people who had breast cancer and 
colon cancer tended to get more chemotherapy.
    Fifth, unlike lots of other previous studies we found that 
patients who received chemotherapy at the end of life had 
substantially higher Medicare costs than patients who did not 
receive chemotherapy, up to a third more.
    Finally, let me make the point that these data are not 
unique to Massachusetts. We did a small sample just to verify 
looking at California patients and found very similar data, 
although the exact numbers varied.
    How might these data affect the hearing here? One of the 
important questions is why are people getting chemotherapy at 
the end of life? What motivates people? There are several 
potential explanations. Let me highlight several.
    First, I have to admit I can't tell you from these data 
exactly why each patient got chemotherapy. We just looked at 
the Medicare data and it's very hard to draw motivations. But 
one potential explanation is that many cancer patients, as 
mentioned by Congressman Ganske, need or want chemotherapy at 
the end of life, especially when they get diagnosed with a 
terminal illness, they go to an oncologist, they have no 
previous relationship and they want to try anything. 
Oncologists acquiesce, give the chemotherapy, and patients then 
find out they may not like it and that is why you get a lot of 
patients getting only one cycle of chemotherapy.
    Another potential explanation is that chemotherapy does, we 
know, improve quality of life of patients. It's very hard for 
those of us who are healthy, who have never had cancer, who 
recognize the side effects, the nausea, the vomiting, baldness, 
that this might improve quality of life, but there are a number 
of studies showing that with lung cancer, colon cancer, ovarian 
cancer, chemotherapy improves pain and improves quality of life 
of dying patients.
    A third potential explanation is that we're just uncertain 
about this, how long in fact are they going to live, and we are 
always cautious, so we would use chemotherapy.
    A fourth potential explanation is that oncologists may give 
chemotherapy for a financial reimbursement, the spread between 
AWP and what they get.
    I want to emphasize from my data I can't tell you which of 
these explanations is right, and we need a lot more research to 
tell how much these factors influence people. But one of the 
major concerns by our study I think is revealed when you 
contrast it with other data we have from Medicare, and I want 
to highlight data from colleagues of mine at Memorial Sloan-
Kettering. They recently looked at chemotherapy administered to 
patients with colon cancer where we know the chemotherapy 
prolongs life and can cure patients, and they revealed that 
only 55 percent of Medicare patients with colon cancer actually 
got chemotherapy. This is chemotherapy for which doctors would 
be reimbursed the same amount as in other cases, and so we know 
there are cases where there is overuse and cases where there is 
under use.
    And this leads me to this issue: While we are focusing on 
costs here, let me suggest that there is a bigger issue, and 
that is that we as oncologists cannot guarantee Americans who 
are diagnosed with cancer get optimal cancer care. Sometimes 
they may get too much chemotherapy, sometimes too little, even 
when oncologists are being reimbursed to give them 
chemotherapy. And I think that what we really need to figure 
out is how we're paying for quality cancer care and that people 
who need the drugs get the drugs, and that's actually why I 
have been working with ASCO on a $5 million project to try to 
figure out how we can get quality cancer care and what are the 
barriers to getting people the right drugs at the right time 
that prolongs their life and improves their quality of life.
    Thank you very much for inviting me, and I will be happy to 
answer any of your questions.
    [The prepared statement of Ezekiel Emanuel follows:]
   Prepared Statement of Ezekiel Emanuel, Chief, Clinical Bioethics 
Department, Warren G. Magnuson Clinical Center, National Institutes of 
                                 Health
    There is substantial concern about end-of-life care provided to 
Americans. In particular, a number of commentators are concerned that 
dying cancer patients are frequently overtreated with chemotherapy. 
Critics contend that many oncologists overtreat dying patients with 
chemotherapy because they are reluctant to accept death and 
apprehensive about discussing end-of-life 
care.\1\,\2\,\3\ Indeed, some critics contend 
that oncologists prey on their patients' vulnerability, implying that 
chemotherapy is the vehicle of hope, and pressing them to try it before 
reconciling themselves to death.\4\ Oncologists respond that it is 
terminally ill patients who demand treatment. More importantly, 
oncologists contend that they use chemotherapy prudently in patients at 
the end of life, when it is likely to provide symptom relief and 
enhance dying patients' quality-of-life.
    How can we determine if chemotherapy is used too frequently for 
terminally ill cancer patients? There are no standards for the 
appropriate use of chemotherapy at the end of life based upon either 
randomized controlled trials or expert, consensus guidelines. While 
there are some data on treatment of patients with metastatic 
cancers,\5\ even basic data on how frequently cancer patients are given 
chemotherapy in the months before death are lacking. To explore whether 
chemotherapy is used prudently and rationally at the end of life, we 
separately examined its use among Massachusetts and California Medicare 
beneficiaries who died of cancer in 1996. Dividing patients into two 
groups according to whether they died of cancers responsive or 
unresponsive to chemotherapy, we evaluated the use of chemotherapy, and 
the expenditures in the last year of life.
                                methods
    Identifying Cancer Decedents: To focus only on persons who died 
from cancer--not merely with cancer--based on the primary cause of 
death listed in the death certificate, we followed a 3-step process. 
First, in both Massachusetts and California we studied fully entitled 
Medicare beneficiaries who died in 1996, were at least 66 years old at 
death and were not enrolled in Medicare's End Stage Renal Disease 
program. Decedents 66 years of age were selected to ensure we obtained 
a full year of Medicare expenditure data prior to death. We studied all 
such decedents in Massachusetts and 5% in California. Second, we merged 
HCFA's denominator files with each state's 1996 death certificate 
files. In Massachusetts, 42,452 Medicare decedents met the criteria. In 
merging the files we used social security number (SSN), date of birth 
(DOB), date of death (DOD) and sex. A match was accepted if either of 
the following conditions was met: 1) there was a perfect match on SSN 
and either sex or both DOB and DOD or 2) a match on at least 7 of SSN 
digits and a perfect match on sex, DOB, and DOD. Of the 42,452 
decedents, there was a match between the HCFA files and death 
certificates for 39,447 (92.9%). Only beneficiaries continuously 
enrolled in both Parts A and B Medicare insurance and who were not 
enrolled in an managed care organization over the entire last 12 months 
of life were retained, yielding 34,131 Massachusetts decedents. Third, 
we selected the 7,919 decedents whose primary cause of death listed on 
the death certificate was cancer.
    In California, the same general protocol was applied to a random 5% 
of Medicare enrollees yielding 4,715 total decedents overall, of which 
956 died of cancer.
    Classifying Cancer Types: We classified breast, colon, and ovarian 
cancers as chemotherapy responsive solid cancers. Multiple 
chemotherapeutic agents shrink these cancers, and randomized trials 
have shown chemotherapy to be effective in prolonging lives of patients 
at least as adjuvant therapy. We classified pancreatic, renal cell, 
hepatocellular, gallbladder, cancers, and melanoma as chemotherapy 
unresponsive solid cancers. In 1996, these cancers were known to be 
``refractory to virtually all chemotherapeutic agents'' such that the 
general consensus in standard textbooks is that ``there are no 
particularly compelling cytotoxic chemotherapeutic agents [with which] 
to treat'' them.\6\
    We examined data for other cancers that we did not categorize as 
responsive or unresponsive. For example, while prostate cancer is 
generally considered a chemotherapy unresponsive solid cancer, hormonal 
injections may appear in claims data as chemotherapy. To avoid 
uncertainty, prostate cancer is reported separately. Lung cancer also 
examined separately because using claims data, it is impossible to 
differentiate lung cancers into small cell and non-small cell (NSCLC) 
tumors. Furthermore, while small cell cancers are chemotherapy 
responsive, using chemotherapy for metastatic non-small cell lung 
cancers is highly controversial.\7\ Data suggest that chemotherapy for 
NSCLC extends life by 6 weeks and may improve quality-of-life despite 
toxicities.\8\,\9\,\10\ Finally, hematological 
malignancies, encompassing both acute and chronic leukemias, Hodgkin's 
disease, and all non-Hodgkin's lymphomas, were analyzed separately. 
Although they are chemotherapy responsive, patients may die acutely 
from treatment related toxicities.
    Identifying the Use of Chemotherapy: Patients who had claims in the 
inpatient, outpatient or physician/supplier Medicare files for 
chemotherapy agents, chemotherapy administration, or the medical 
supervision of chemotherapy were considered to as having received 
chemotherapy. The codes used were: intravenous chemotherapy agents--
HCPCS codes 964XX, 965XX, J9000-9999; chemotherapy administration--IC 
Procedure 99.25, HCPCS codes Q0083-Q0085; medical evaluation for 
chemotherapy--ICD Diagnosis V58.1, V66.2, and V67.2. It is possible 
that our method of identifying chemotherapy missed patients who 
received oral chemotherapeutic agents. Patients without claims using 
these codes were classified as not having chemotherapy.
    We examined chemotherapy use for decedents for 30-day periods from 
the date of death back for 12 months.
    Expenditure Data: Total expenditure is calculated as the sum of 
HCFA payments and payments from other sources of insurance for Medicare 
covered services. The average payment per person from other insurance 
accounts for only 0.15% of costs. Expenditures for each decedent are 
calculated from 5 HCFA files: 1) Medicare Provider Analysis and Review 
(MedPAR), including acute hospitalizations, long term hospitalizations, 
and skilled nursing home care; 2) Hospital outpatient; 3) Part B 
physician-supplier; 4) Home health care; and 5) Hospice. Durable 
medical equipment (DME) expenses were excluded, but in Massachusetts, 
they contributed just $400 per person over the last year of life.
                                results
    Frequency of Chemotherapy in the Last Months of Life: Figure 1 
shows that 41% of our study population in Massachusetts received 
chemotherapy in the last year of life. Fully 33% of Massachusetts 
cancer decedents received chemotherapy in the last 6 months of life, 
23% in the last 3 months of life, and 9% of cancer decedents received 
chemotherapy in the very last month of life.
    Table 1 provides data on the proportion of terminally ill cancer 
patients treated in Massachusetts with chemotherapy in the last 6, 3 
and 1 months of life. Patients who died of hematological malignancies 
received chemotherapy most frequently, with more than half getting 
chemotherapy in the last 6 months of life and 19% in the last month of 
life. Massachusetts patients with chemotherapy unresponsive solid 
cancers received chemotherapy at about the same frequency as patients 
with chemotherapy responsive solid cancers (Table 1). Among patients 
with chemotherapy unresponsive solid cancers taken together 
(pancreatic, hepatocellular, gallbladder, and renal cell cancers and 
melanoma) 23% received chemotherapy in the last 3 months of life, which 
was the same as the percentage of patients with chemotherapy responsive 
cancers (breast, colon, ovarian) that received chemotherapy.
    An interesting example of the use of chemotherapy at the end of 
life is pancreatic cancer. In the last 6 months of life, 33% of 
Massachusetts patients dying of pancreatic cancer received 
chemotherapy, 25% in the last 3 months, and 8% in the last month of 
life. On May 15, 1996, the FDA approved gemcitabine as the first agent 
shown to be effective in pancreatic cancer. Prior to this date, when 
there were no effective agents, 28% of patients dying of pancreatic 
cancer received chemotherapy in the last 6 months of life. After May 
15th, 37% received chemotherapy (one-sided p=0.04).
    A comparison of the chemotherapy unresponsive melanoma and renal 
cell cancer with chemotherapy responsive breast and colon cancers is 
also instructive. Of patients dying of melanoma, 21% received 
chemotherapy in the last 3 months of life and 10% in the last month of 
life. Similarly, among patients dying of renal cell cancer, 22% 
received chemotherapy in the last 3 months of life and 7% in the last 
month of life. Surprisingly the frequency of chemotherapy for dying 
breast and colon cancer patients was almost identical. 22% of patients 
dying of breast cancer received chemotherapy in the last 3 months and 
8% in the last month of life. Similarly, 23% of patients dying of colon 
cancer received chemotherapy in the last 3 months and 7% in the last 
month of life.
    There are no substantial differences in the use of chemotherapy by 
sex (Table 1). However, the use of chemotherapy at the end of life is 
age related. Among Massachusetts patients 65-74 32% received 
chemotherapy in the last 3 months of life, compared to 22% for patients 
75 to 84 year old, and 11% for patients over 85 years of age (Table 1). 
These variations by age were similar in chemotherapy unresponsive and 
responsive solid cancers (Table 2). Overall, 13% of 85 year olds with 
chemotherapy unresponsive solid cancers received chemotherapy in the 
last 3 months of life compared to 10% of 85 year olds with chemotherapy 
responsive solid cancers (Table 2).
    Number of Months of Chemotherapy in the Last Months of Life: Among 
Massachusetts patients who received chemotherapy in the last 6 months 
of life, 41% had a short ``trial,'' just one month or less of 
chemotherapy, with 36% receiving chemotherapy for 1 to 3 months, 23% 4 
or more months of chemotherapy (Table 3). The number of months of 
chemotherapy did not depend on sex, but did depend upon age (Table 3).
    Importantly, the chemotherapy responsiveness of the solid cancers 
was associated with a difference in the number of months of 
chemotherapy provided to decedents (Table 3). Among Massachusetts 
patients dying of chemotherapy unresponsive tumors who received 
chemotherapy, over half received 1 month or less of chemotherapy and 
31% received chemotherapy for 1 to 3 months. Conversely, among patients 
dying of chemotherapy responsive cancers who received chemotherapy a 
third received 1 month or less of chemotherapy and 40% received 
chemotherapy for 1 to 3 months of the last 6 months of life. Notably, 
17% of patients dying from chemotherapy unresponsive cancers had 4 or 
more months of chemotherapy (Table 3).
    Returning to patients with pancreatic cancer, 49% received 
chemotherapy for 1 month or less, 34% for 1 to 3 months and 3% during 
each of the last 6 months. For patients dying of breast cancer, 32% 
received chemotherapy for 1 month or less, 39% for 1 to 3 months and 5% 
across all 6 final months.
    The Use of Chemotherapy and Expenditures: Annual expenditures for 
dying Massachusetts cancer patients who received chemotherapy in the 
last 6 months of life were 32.5% higher than patients who did not 
receive chemotherapy ($39,707 v. $29,974) (Table 4). Annual expenditure 
for patients with chemotherapy unresponsive cancers who received 
chemotherapy was $33,365 about 10% less than the expenditure for 
patients with chemotherapy responsive cancers who received chemotherapy 
($36,684). Expenditures for patients with chemotherapy unresponsive 
cancers who received chemotherapy were 20% more than for patients with 
the same cancers who did not receive chemotherapy ($33,365 v. $27,737), 
while expenditures for patients with chemotherapy responsive cancers 
who received chemotherapy were 23.9% more than for patients with the 
same cancers who did not receive chemotherapy ($36,684 v. $29,610).
    Comparison with Cancer Decedents from California: We used decedents 
our sample of 956 cancer decedents from California to test whether our 
findings in Massachusetts might apply more generally (Table 5). Among 
California cancer decedents, 26% received chemotherapy in the last 6 
months of life, 20% in the last 3 months and 9% in the last month of 
life. Among decedents with chemotherapy responsive tumors, 17% received 
chemotherapy in the last 3 months of life compared to 20% for the 
chemotherapy unresponsive tumors.
    Similarly, use of chemotherapy at the end of life was age related 
in California for both chemotherapy responsive and unresponsive 
cancers. Among decedents aged 65-74, 26% of those with chemotherapy 
responsive tumors compared to 32% of those with chemotherapy 
unresponsive tumors received chemotherapy in the last 3 months of life. 
Similarly, among decedents aged 75-84 19% of those with responsive 
tumors compared to 18% of decedents with unresponsive tumors received 
chemotherapy in the last 3 months of life. Overall, 25% of patients 
with chemotherapy responsive tumors receiving chemotherapy received 
less than 1 month of chemotherapy while 35% of those with chemotherapy 
unresponsive tumors did so.
                               discussion
    This study provides insight into the frequency of use of 
chemotherapy at the end of life. Overall 33% of Medicare patients dying 
of cancer in Massachusetts in 1996 received chemotherapy in the last 6 
months of life and nearly a quarter in the last 3 months. Most 
surprisingly, patients dying of chemotherapy unresponsive cancers, such 
as pancreatic, gallbladder, renal cell, and hepatocellular cancers, 
were just as likely to receive chemotherapy at the end of life as 
patients dying of chemotherapy responsive cancers, such as breast, 
colon, and ovarian cancers. This suggests overuse of chemotherapy at 
the end of life, at least among patients with chemotherapy unresponsive 
cancers.
    Traditionally, to document over- and underuse of health care 
services, studies compare claims data with optimal practices 
established by randomized controlled trials or by expert, consensus 
panels. Lacking randomized trials or consensus panels to establish 
standards for the appropriate use of chemotherapy at the end of life, 
we examined tumor responsiveness to chemotherapy. Cancers are 
traditionally divided in those that are chemotherapy responsive, in 
which chemotherapy can commonly induce complete and partial responses, 
compared to those in which chemotherapy rarely leads to tumor 
shrinkage. In our data, lack of responsiveness of the cancer to 
chemotherapy did not reduce the prevalence of chemotherapy use. 
Patients with unresponsive cancers were just as likely to receive 
chemotherapy in the last few months of life as patients with 
chemotherapy responsive cancers. Indeed, patients with unresponsive 
cancers were slightly more likely to receive chemotherapy than patients 
with lung cancer in which data suggests chemotherapy in the last 6 
months of life, may extend life by a few weeks and even palliate 
symptoms.
    Although patients dying of chemotherapy unresponsive solid cancers 
received chemotherapy as frequently as those with responsive cancers, 
they received fewer months of chemotherapy. This suggests some 
selectivity in the use of chemotherapy at the end of life. It is 
possible that after one cycle of therapy many patients and oncologists 
are convinced by ineffectiveness and/or the side effects to stop 
treatment for chemotherapy unresponsive cancers. Nevertheless, 17% of 
patients receiving chemotherapy for chemotherapy unresponsive cancers 
received chemotherapy during four or more of the final 6 months of 
life.
    Many reasons may explain the use of chemotherapy at the end of life 
for patients with unresponsive cancers. The most reasonable explanation 
may be that patients and families demand to at least ``try'' to see if 
chemotherapy might shrink the cancer. Oncologists frequently meet 
patients for the first time right after they have been newly diagnosed 
with chemotherapy unresponsive tumors that present a bleak prognosis. 
These patients and their families often want to try anything that might 
shrink their cancers. Indeed, data suggest that cancer patients are 
willing to endure significant side effects for very small prolongations 
in life.\11\,\12\ Lacking an established relationship with 
the patient or family and confronting an emotional demand to try 
anything, oncologists may acquiesce. One cycle of chemotherapy is often 
sufficient for patients and families to adjust and absorb the realities 
of the diagnosis, prognosis, and to realize the ineffectiveness of the 
chemotherapy and the undesirable side effects. That over half of the 
patients receiving chemotherapy for unresponsive cancers received 1 
month or less of chemotherapy strongly supports this explanation. 
Obviously, additional research is necessary to provide insights into 
how much of a role patient and family demand plays in the use of 
chemotherapy at the end of life.
    Other potential reasons for the use of chemotherapy at the end of 
life include uncertain prognosis and time of death, uncertain 
responsiveness of the cancer to chemotherapy, and use of experimental 
chemotherapies. These reasons are unlikely to account for our data on 
chemotherapy unresponsive solid cancers. While the exact date of death 
cannot be known in advance, cancers, especially chemotherapy 
unresponsive solid cancers, are unlike the terminal phases of COPD or 
heart failure; they tend to have a monotonic, unremitting decline to 
death despite all interventions.\13\ Typically within the last three 
months of life, oncologists can predict, with reasonable certainty that 
the patient will die in a few months regardless of treatment. 
Furthermore, there is no real uncertainty about the chemotherapy 
unresponsiveness of the solid tumors we classified as ``unresponsive.'' 
Finally, although some patients may be receiving experimental 
chemotherapy, this is likely to be rare among Medicare beneficiaries 
who are often ineligible due to age and comorbidities.
    Yet another potential explanation for the use of chemotherapy for 
patients with unresponsive cancers is that chemotherapy may improve 
quality of life and palliate symptoms for dying patients even if it 
fails to prolong life or shrink tumors.\14\,\15\ There are 
some data supporting the palliative effect of chemotherapy for lung and 
colon cancer and some suggestions that this might also operate in 
ovarian cancer.\16\,\17\,\18\,\19\ 
Frequently, emotional functioning and fatigue are the quality-of-life 
subscales with the most improvement. That these improvements occur 
without objective tumor responses suggests that they may be related to 
patient expectations or possibly the placebo effect of chemotherapy, 
rather than any biological impact.\20\ The mechanism by which 
chemotherapy in terminal phases may palliate without objectively 
shrinking cancers requires further research.
    The similar frequency of chemotherapy use regardless of the 
responsiveness of the cancer may be because near terminal patients with 
breast, colon, and ovarian cancers may have been treated with many 
different chemotherapy regimens and their cancers may have become 
chemotherapy resistant. In this way, patients dying of chemotherapy 
responsive tumors may be more like decedents with chemotherapy 
unresponsive cancers. This does not justify using chemotherapy for 
unresponsive tumors. It also raises the question of whether providing 
chemotherapy in the last 3 months of life to nearly a quarter of cancer 
patients whose tumors have become resistant to chemotherapy is itself 
an indication of overuse.
    This study suggests that use of ineffective chemotherapy consumes 
substantial medical resources. Annual expenditures for patients who 
received chemotherapy, regardless of the responsiveness of the cancer, 
were 32.5% higher than for patients who did not receive chemotherapy in 
the last 6 months of life. Among patients who died of chemotherapy 
unresponsive cancers, the use of chemotherapy in the last 6 months of 
life was associated with 20% higher annual expenditures, or more than 
$5,500 per decedent. The extra amount spent on providing chemotherapy 
to patients dying of unresponsive cancers is comparable to the average 
annual expenditure for all Medicare beneficiaries and nearly one third 
higher than annual per capita health expenditures in the U.S. These 
data contrast with studies suggesting that compared to ``best 
supportive care'' chemotherapy for non-small cell lung cancer does not 
increase, and may even decrease medical 
costs.\21\,\22\,\23\ The disjunction between our 
results and these studies may arise because of the difficulty in 
translating results of randomized trials into actual clinical practice. 
Care protocols in research may limit use of unnecessary interventions, 
whereas in actual clinical practice use of treatments, 
hospitalizations, and other interventions vary more. Furthermore, the 
cost data on best supportive care come only from Canada and are more 
than a decade old21-23, and patients receiving best supportive care 
were frequently hospitalized, using more hospital days than patients 
receiving chemotherapy. These old data, especially of hospitalizing 
patients receiving ``best supportive care'' reflect practices not found 
in these data and unlikely to still be common. It may also be that in 
actual clinical practice patients not receiving chemotherapy may not be 
receiving ``best supportive care'' reducing expenditures.
    Finally, this overuse of treatment at the end of life is 
particularly wasteful when placed in the context of the documented 
underuse of treatments proven by randomized controlled trials to be 
effective in prolonging life. Studies have shown that only 55% of 
Medicare beneficiaries receive adjuvant chemotherapy for Stage III 
colon cancer.\24\ Indeed, among 85 year old patients the use of 
chemotherapy for Stage III colon cancer is 11% less than the frequency 
of the use of chemotherapy in the last 3 months for 85 year olds with 
chemotherapy unresponsive cancers. Unfortunately, it appears that there 
may be overuse of chemotherapies in the last few months of life 
coincident with underuse of therapies known to be effective in 
prolonging life.
    In health care, Massachusetts is known as a high use and high cost 
state.\25\ A major issue is whether these data on chemotherapy use at 
the end-of-life are unique to Massachusetts or are generalizable. While 
there are some differences in the absolute use of chemotherapy for some 
cancers, our data from California, although limited, suggest a similar 
pattern of use of chemotherapy at the end of life. In California one in 
five cancer decedents receive chemotherapy in the last 3 months of 
life, and this does not differ between chemotherapy responsive and 
unresponsive cancers. Clearly, these results need to be confirmed in 
other, larger populations. However, these data show that the situation 
in Massachusetts is not unique.
    This study has some significant limitations. First, the data may 
not generalize in other ways. Chemotherapy use among decedents under 65 
years of age might be different. The strong trends toward greater use 
of chemotherapy among younger decedents suggests these data might 
actually underestimate chemotherapy use in the last 6 months of life 
among cancer decedents of all ages. Chemotherapy use in managed care 
settings also might differ. Second, we have no data on stage of cancer; 
some patients may have died from acute toxicities of chemotherapy 
without being terminally ill. However, data from trials suggest that 
acute toxic deaths among patients receiving adjuvant therapy are rare, 
and thus unlikely to account for a substantial proportion of cancer 
mortality.\26\ Indeed, adjuvant chemotherapies associated with high 
toxic mortality would be used infrequently. Third, the cause of death 
listed on death certificates is not always accurate. However, listing 
cancer as the cause of death may be insensitive, but it is specific, 
and Massachusetts and California are among the states with the most 
accurate death certificates. Fourth, annual expenditures were 
calculated but we tracked chemotherapy use only in the last 6 months of 
life. Decedents who received chemotherapy in the 7 to 12 months before 
death only are classified in the ``no chemotherapy'' group, increasing 
the costs of this group. This makes the difference in expenditures 
appear smaller than if the comparison had been with decedents who had 
received no chemotherapy in the entire last year of life. Most 
importantly, these data provide no explanation for why chemotherapy is 
provided in any particular case. Additional study is needed to 
determine the reasons why chemotherapy is used in the last 6 months of 
life, especially for chemotherapy unresponsive cancers.
                               conclusion
    There is substantial disagreement about whether chemotherapy is 
used appropriately in patients near the end of life. This study 
demonstrates that one third of patients in Massachusetts receive 
chemotherapy in the last 6 months of life, even among those persons 
dying from chemotherapy unresponsive cancers. Oncologists should 
reconsider the use of chemotherapy at the end of life.
                            acknowledgements
    We would like to thank Joan Warren, Deborah Schrag, and Peter Bach 
for helpful advice and comments on the project and manuscript. We would 
also like to thank many questioners at the 2001 Annual American Society 
of Clinical Oncology meeting for helpful challenges.

 Frequency of Patients Receiving Chemotherapy in the Last Months of Life
                         (This will be a figure)
------------------------------------------------------------------------
                                                          Massachusetts
                                                            (N=7,919)
------------------------------------------------------------------------
Last 1 month of life...................................              9%
Last 2 months..........................................             17%
Last 3 months..........................................             23%
Last 4 months..........................................             28%
Last 5 months..........................................             31%
Last 6 months..........................................             33%
Last year of life......................................             41%
------------------------------------------------------------------------


  TABLE 1: Characteristics of Massachusetts Cancer Decedents by Receipt of Chemotherapy in the Last 6 Months of
                                                      Life
----------------------------------------------------------------------------------------------------------------
                                                                                  Cancer Decedents Receiving
                                                                                     Chemotherapy in Last:
                                                                      All    -----------------------------------
                                                                     Cancer    6 months    3 months   1 month of
                                                                   Decedents    of life     of life      life
                                                                               (N=2,625)   (N=1,854)    (N=715)
----------------------------------------------------------------------------------------------------------------
All Cancers...........................  .........................      7,919        33%         23%          9%
Sex...................................  Male.....................      3,863        35%         22%         10%
                                        Female...................      4,056        31%         26%          8%
Age...................................  65-74....................      2,926        44%         32%         12%
                                        75-84....................      3,392        31%         22%          8%
                                        85+......................      1,601        16%         11%          5%
Chemotherapy Responsive Solid Cancers.  Total....................      1,627        34%         23%           %
                                        Breast...................        612        30%         22%          8%
                                        Colon....................        846        32%         23%          7%
                                        Ovarian..................        269        47%         30%          7%
Chemotherapy Unresponsive Solid         Total....................        870        31%         23%          9%
 Cancers.
                                        Pancreas.................        408        33%         25%          8%
                                        Melanoma.................         84        30%         21%         10%
                                        Renal Cell...............        147        29%         22%          7%
                                        Hepatic and Gallbladder..        231        29%         20%          8%
Other Types of Cancer.................  Lung.....................      2,003        28%         19%          7%
                                        Prostate.................        602        39%         28%         10%
                                        Hematological*...........        760        51%         42%         19%
                                        All Other................      2,057        30%         20%          9%
----------------------------------------------------------------------------------------------------------------
* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin's disease, but excludes multiple
  myeloma.


 TABLE 2: Massachusetts Cancer Decedents Receiving Chemotherapy in the Last 3 Months of Life by Cancer Type and
                                                       Age
----------------------------------------------------------------------------------------------------------------
                                                                  Number of
                                                                  Patients
                                                                   Getting
                                                                Chemotherapy     65-74       75-84        85+
                                                                  in last 3    (N=2,926)   (N=3,392)   (N=1,601)
                                                                  Months of
                                                                    Life
----------------------------------------------------------------------------------------------------------------
All Cancers..........................  .......................        1,854         32%         22%         11%
Chemotherapy Responsive Solid Cancers  Total..................          377         36%         21%         10%
                                       Breast.................          135         38%         19%          7%
                                       Colon..................          191         33%         23%         11%
                                       Ovarian................           51         43%         22%         17%
Chemotherapy Unresponsive Solid        Total..................          199         30%         22%         13%
 Cancers.
                                       Pancreas...............          101         33%         24%         12%
                                       Melanoma...............           18         27%         19%         13%
                                       Renal Cell.............           33         36%         15%         10%
                                       Hepatic and Gallbladder           47         23%         21%         15%
Other Types of Cancer................  Lung...................          371         28%         12%          6%
                                       Prostate...............          170         32%         34%         11%
                                       Hematological*.........          321         54%         44%         17%
                                       All Other..............          416         26%         20%         11%
----------------------------------------------------------------------------------------------------------------
* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin's disease, but excludes multiple
  myeloma.


     TABLE 3: The Number of Months of Chemotherapy Provided to Massachusetts Cancer Decedents Receiving Any
                                    Chemotherapy in the Last 6 Months of Life
----------------------------------------------------------------------------------------------------------------
                                                                                                         Mean
                                                                    1 Month     1 to 3     3 Months    Number of
                                                                    or Less>    Months>                 Months
----------------------------------------------------------------------------------------------------------------
All Cancers...........................  .........................        41%        36%         19%         2.4
Sex...................................  Male.....................        38%        36%         20%         2.2
                                        Female...................        45%        36%         16%         2.5
Age...................................  65-74....................        35%        39%         21%         2.5
                                        75-84....................        44%        35%         17%         2.3
                                        85+......................        59%        28%         11%         1.9
Chemotherapy Responsive Solid Cancers.  Total....................        33%        40%         22%         2.6
                                        Breast...................        32%        39%         24%         2.6
                                        Colon....................        35%        41%         19%         2.5
                                        Ovarian..................        29%        39%         24%         2.8
Chemotherapy Unresponsive Solid         Total....................        52%        31%         14%         2.0
 Cancers.
                                        Pancreas.................        49%        34%         14%         2.1
                                        Melanoma.................        56%        36%          0%         1.8
                                        Renal Cell...............        51%        37%         10%         2.0
                                        Hepatic and Gallbladder..        59%        21%         17%         2.1
Other Types of Cancer.................  Lung.....................        45%        39%         13%         2.2
                                        Prostate.................        30%        31%         31%         3.0
                                        Hematological*...........        32%        39%         22%         2.7
                                        All Other................        50%        33%         14%         2.1
----------------------------------------------------------------------------------------------------------------
* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin's disease, but excludes multiple
  myeloma.


 TABLE 4: Expenditures in the Last Year of Life for Massachusetts Cancer Decedents by Receipt of Chemotherapy in
                                            the Last 6 Months of Life
----------------------------------------------------------------------------------------------------------------
                                                                          Decedents                  % Increase
                                                                        who Received    Decedents        for
                                                                             No       who Received    Decedents
                                                                        Chemotherapy  Chemotherapy    Receiving
                                                                            (N=)          (N=)      Chemotherapy
----------------------------------------------------------------------------------------------------------------
All Cancers..............................  ...........................       $29,974       $39,707         32.5%
Sex......................................  Male.......................       $29,729       $39,539         33.0%
                                           Female.....................       $30,193       $39,890         32.1%
Age......................................  65-74......................       $32,551       $43,042         32.2%
                                           75-84......................       $31,155       $36,989         18.7%
                                           85+........................       $24,803       $34,055         37.2%
Chemotherapy Responsive Solid Cancers....  Total......................       $29,610       $36,684         23.9%
                                           Breast.....................       $26,817       $36,277         35.3%
                                           Colon......................       $31,435       $32,972          4.9%
                                           Ovarian....................       $30,870       $50,400         63.5%
Chemotherapy Unresponsive Solid Cancers..  Total......................       $27,737       $33,365         20.3%
                                           Pancreas...................       $26,356       $35,371         34.2%
                                           Melanoma...................       $19,982       $32,717         63.7%
                                           Renal Cell.................       $32,923       $35,735          8.5%
                                           Hepatic and Gallbladder....       $27,911       $29,275          4.9%
Other Types of Cancer....................  Lung.......................       $29,750       $38,967         31.0%
                                           Prostate...................       $27,685       $34,167         23.4%
                                           Hematological*.............       $34,430       $52,619         52.8%
                                           All Other..................       $30,861       $39,830         29.1%
----------------------------------------------------------------------------------------------------------------
* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin's disease, but excludes multiple
  myeloma.


                   TABLE 5: The Characteristics of California Cancer Decedents by Receipt of Chemotherapy in the Last 6 Months of Life
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Cancer Decedents Receiving Chemotherapy in Last:
                                                                                         All Cancer   --------------------------------------------------
                                                                                         Decedents       6 months of      3 months of    1 month of life
                                                                                                         life (N=253)     life (N=191)        (N=85)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Cancers.....................................  ..................................             956              26%              20%               9%
Sex.............................................  Male..............................             437              30%              24%              11%
                                                  Female............................             519              23%              17%               7%
Age.............................................  65-74.............................             323              39%              31%              12%
                                                  75-84.............................             444              25%              18%               9%
                                                  85+...............................             189               8%               6%               3%
Chemotherapy Responsive Solid Cancers...............................................             175              25%              17%               6%
Chemotherapy Unresponsive Solid Cancers.............................................             108              24%              20%               8%
Other Types of Cancer...........................  Lung..............................             280              23%              17%               8%
                                                  Prostate..........................              83              37%              27%              13%
                                                  Hematological*....................             112              36%              29%              14%
                                                  All Other.........................             198              25%              19%               9%
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Includes all acute and chronic leukemias, non-Hodgkin lymphomas, Hodgkin's disease, but excludes multiple myeloma.

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    Mr. Greenwood. Thank you, Dr. Emanuel, for your coming in 
and your helpful testimony. I appreciate that.
    The Chair recognizes himself for 5 minutes to ask 
questions. Let me turn to Dr. Norton first.
    It is evident from this hearing and from all of the work 
we've done leading up to this hearing, which has been 
extensive, that there is virtual unanimity among most Members 
of Congress with the GAO, the IG, the pharmaceutical industry, 
and your association that we need to get rid of AWP, that it's 
irrational, that it causes overpayments, cruel overpayments to 
beneficiaries. That is certainly inconsistent with what the 
intention of Medicare is. There is also, I would say, virtual 
unanimous consent to the notion that we need to then 
simultaneously, so that there is no disruption in service or no 
inequity imposed by our changes, come back with a way to make 
sure that your profession and all of the other professions that 
are here and that are not here who would be affected by a 
change in AWP are adequately and appropriately reimbursed.
    Now, the GAO study says that in order to do that, we need 
to put about $51 million into increasing practice expenses. Mr. 
Scully from CMS testified that he thought the number was 
somewhere between $45 and $55 million and that those figures 
were arrived at totally independently, which gives us a fair 
amount of confidence in the order of magnitude of those 
changes.
    Does your association--you have submitted a white paper, et 
cetera. I have a sneaking suspicion that your association 
thinks that the number might be a bit higher than that. Are you 
putting a number on the table here?
    Mr. Norton. We don't think we have the data--we don't think 
that anybody has the data to come up with an accurate number, 
frankly. It gets down to fundamental logical issues about what 
it actually costs to give chemotherapy. The GAO report we 
haven't seen yet, the latest one. We thought that this issue is 
being studied carefully. We're--and I think we're going to have 
to scrutinize the report to see whether the report which just 
came out to today really does address the issue, but the only 
real way we feel that you can actually figure out the cost is 
to measure the cost of what is really required, how much 
nursing time is required, the cost of the syringe, the cost of 
the IV tubing, cost of the needles, the cost of the tape. All 
these things are costs, the inventory of drugs, spillage, 
wastage, all these issues that are involved, and we really 
don't have that data.
    We will be very happy to do a survey to collect that data. 
We'll be very happy to work with the government, anybody who 
Congress designates to work to actually get that data, but just 
looking at this as a scientist, I don't think that the methods 
really are giving us the numbers we really need to figure out 
what the true costs are.
    Mr. Greenwood. Thank you. While I am posing this next 
question, if Mr. Martyn and Mr. Connaughton would separate 
yourselves and, Mr. Scanlon, if you would bring a chair up and 
I am going to ask you to comment after I ask Dr. Norton another 
question.
    In your testimony, Dr. Norton, you said that--and I am 
quoting--``Oncologists and their professional staffs typically 
furnish a variety of services to cancer patients for which 
there is no explicit reimbursement. These services include 
extensive support that seriously ill cancer patients frequently 
require, including social work services, psychosocial services, 
nutrition counseling. Social work services encompass a variety 
of services intended to help patients carry out their therapy, 
such as help with insurance, arranging transportation to 
treatment and filling prescriptions. Psychosocial support 
includes services such as counseling patients on their 
activities of daily living, support groups that meet in the 
physician's office and grief counseling. In addition, 
physicians treating cancer patients perform an extraordinarily 
high amount of work outside the patient's presence, including 
family counseling, telephone calls, arranging for entry into 
clinical trials, and so forth.''
    And I don't doubt any of that and I have visited 
oncologists in my district and I have heard from them and from 
their staff similar concerns.
    Let me actually turn to Mr. Scanlon, and if you will pull 
the microphone up. I would assume that there are other medical 
specialties that either provide or would like to provide and be 
reimbursed for these services. Does Medicare reimburse anyone 
for these kinds of services in addition to their regular fees?
    Mr. Scanlon. Not explicitly. The issue here with 
oncologists and other specialities, the way that the system has 
been constructed, is that the costs of these kinds of services 
to the extent that they are incurred by a practice are included 
in calculating fees but they are distributed across the 
procedures and the services that are being recognized by 
Medicare. This is something that is related to the American 
Medical Association, which is establishing the CPT, the current 
procedural local terminology system, which identifies what are 
discrete services that physicians are going to provide, and 
then there is some amendment or modification of those by 
Medicare. That process is what we need to look at, and as I 
mentioned, we are doing work on additional data. This is one of 
the areas where we need additional data. Should there be 
discrete activities that are now recognized as services and 
sort of why isn't it that they haven't been identified as 
discrete services under CPT?
    Mr. Greenwood. Let me just ask you this. When you came 
forward with your $51 million estimate to compensate to raise 
the practice expenses, were you assuming that any of these 
kinds of services would be included in that?
    Mr. Scanlon. We were not assuming they would be included 
explicitly, but we were assuming that the costs of those 
services were reflected in the data that we had and that those 
costs were distributed--$51 million represented distributing 
those costs more appropriately across different services and 
across different specialties. So we feel like the data and the 
method reflect these services, but better data may lead to a 
different change in fees.
    Mr. Greenwood. Dr. Norton, your comments.
    Mr. Norton. We don't think they have the data. If they are 
relying--like the AMA data, there are a small number of 
oncology practices that were scrutinized and there was a 
tremendous amount of estimation involved. One thing that makes 
oncology different from other specialties is other specialties 
it's some patients that require these services. In medical 
oncology it's essentially everybody. As the therapies go on, as 
patients get sicker, as the medicines change, it sometimes gets 
more complex rather than less. The time the nurse spends with 
the patient talking about the drugs, talking about the side 
effects, monitoring for side effects during the infusion and 
between infusions, this is just essential and it's not covered 
at all. It's just--and it's not really reflected in the 
numbers. It's not really reflected in the data because it 
hasn't been scrutinized carefully.
    Mr. Greenwood. Let me just bring forth, when we are talking 
about data here, one piece of data. A recent survey in Modern 
Health Care estimated that the average oncologist's salary 
could be as high as $334,000 per year. Is that a figure that 
you think is within the ballpark, sir?
    Mr. Norton. That sounds high to me, and I've seen surveys 
of various medical specialties. I don't actually recall the 
absolute numbers but they varied a lot, again depending upon 
the sample that was used, the geography, and many other 
samples. But I do remember that medical oncologists were not 
outliers in terms of their income by any stretch of the 
imagination in terms of other medical specialists.
    You know, if medical oncology were a very attractive 
specialty for financial reasons we would have an abundance of 
candidates. You know, we're having trouble filling our training 
programs. Everybody who trains medical oncologists is having 
trouble finding quality candidates for their training programs. 
It's not a highly subscribed speciality because it is so 
difficult. It is such a difficult life-style and it's not an 
especially lucrative life-style either.
    Mr. Greenwood. Thank you, sir. The gentleman from Ohio, Mr. 
Brown, for 5 minutes.
    Mr. Brown. Dr. Norton, I have an article from the Journal 
of Cancer Economics, March, 1997, and I was intrigued by a 
speech made by a chief medical officer at United Health Care 
Corporation in Minneapolis to the National Cancer Centers 
Network, which as I understand the audience is made up of many 
oncologists and other people. I want to read a little bit from 
what he said and ask what's happened in the last 4 years. This 
is March 1997.
    He says, ``You're going to have to make chemotherapy a cost 
neutral equation. I would tell you that the industry is 
probably going to do this for you. Without eliminating the 
markup on drugs, I really do fear that you are going to lose 
credibility within organizations outside. Employers are already 
bringing this up to me. What are you doing about oncologists 
who are making too much money on drugs? My case managers are 
coming to see me and saying that about half my patients are 
dying within 2 weeks of their last chemotherapy course. So 
where was the oncologist saying it is time for quality of care? 
Let me give you good supportive care and pain relief. Let me 
get you into a hospice.''
    He then goes on to say, ``The markups for chemotherapy 
medicines are going to be so high that the public is beginning 
to react. You are losing credibility from that,'' he tells the 
oncologist. ``What you will see happening in my company and I 
suspect others is that you will no longer be getting reimbursed 
at average wholesale price.''
    What you will see happening in my company, and I suspect 
others, is that you will no longer be getting reimbursed at 
average wholesale price; you will be getting reimbursed at 
catalog prices. The reason for doing that is to make this 
decision truly a decision made, because it's the right thing to 
do, not because you have a financial incentive.
    It sounds to me, from taking these excerpts, that managed 
care was not going to take it anymore; in a sense, that they 
were not going to pay you the--they were not going to follow 
the price structure that Medicare seems to.
    What has happened in these 4 years?
    Mr. Norton. No, that's not an individual I know or an 
organization that I attend. So I don't know exactly what 
transpired there, what was, you know, sort of implied by all 
this.
    Mr. Brown. What has happened with managed care payments?
    Mr. Norton. The managed care payments generally are much 
lower than the actual costs of administration of the therapy. 
You know, sort of across the board, it really is a big issue.
    Mr. Brown. Lower than Medicare?
    Mr. Norton. I do not know the specifics, sir. I do not know 
the specifics.
    I do know, for example, in my own center that if I didn't 
have philanthropy pouring into the center, I couldn't provide 
anyone near the services I provide. I applaud my colleagues in 
practice, especially small practices, for doing as much as they 
can with the amount of money that they have flowing in.
    Mr. Brown. So you can't tell me if Medicare--if managed 
care companies are paying more or less than Medicare?
    Mr. Norton. I personally cannot. I can't provide that 
information for you in great detail.
    Mr. Brown. Considering the markup, considering if a drug 
costs $200 and Medicare is reimbursing 1,000 and the oncologist 
is pocketing some amount of the 800, I would think you'd give 
us some ball park about what might be happening with managed 
care companies.
    Mr. Norton. I would challenge the notion of the doctor 
pocketing the money. The doctor is using that money to take 
care of the patient. That is what is happening. It is a broken 
axle and it's a broken wheel. We have to understand the system 
is working, quality is being provided and the money coming in 
that's in excess of one side is balancing the other. We've all 
said the same thing.
    Mr. Brown. I wish you were a little better informed about 
the managed care side of it, because when I--I go back to 
Chairman Tauzin's comments earlier about the fact that the 
copay for many seniors is actually more than the cost of the 
drug that the doctor is paying. In some cases, that 20 percent 
is 20 percent of a much larger, huge number in some cases than 
20 percent of the real cost of the drug; and I would think 
maybe if we were able--if anybody on this panel could give us 
the information about how much a drug--how much the managed 
care companies were paying, maybe we could help Mr. Scully come 
up with ``20 percent of what'' figures, because we don't know. 
We only know 20 percent of the AWP, but it would be nice to 
know 20 percent of the lesser figure, and perhaps the managed 
care companies have alighted on that figure, if you will. But 
apparently nobody on this panel, with as much expertise as you 
have, can tell me what managed care has done in the last 3 or 4 
years.
    Mr. Norton. I'm not an expert in health economics, frankly. 
I can get the information for you, and I'd be delighted to work 
with you on it, but, no, I don't know that.
    But I do know----
    Mr. Brown. Would you submit that for the record, please, 
Dr. Norton?
    Mr. Norton. Any information you need, you ask us, we'll 
provide.
    Mr. Brown. Thank you.
    I'd like to know what managed care companies, versus what--
for these 24 drugs; is that it--these 24 drugs, what managed 
care companies are paying, on average.
    Mr. Norton. As I said, we'll be very happy to cooperate 
with Congress in every way to give you the information you 
need.
    Mr. Brown. Good. Thank you.
    Mr. Emanuel. I just wanted to say one thing about the 
patients and managed care companies.
    Almost exclusively, in managed care companies they do not 
pay a percentage of the drug, right, almost exclusively in 
managed care companies. If Medicare is going to look like 
managed care companies, they are going to have a fee schedule 
that is like $5 and $10, independent of the price of the drug. 
Okay? That is the way managed care companies are run now.
    Now, they may be shifting because of rising prices----
    Mr. Brown. If I can interrupt, Dr. Emanuel. I don't think 
that--because Medicare doesn't have much of a track record of 
paying for drugs. Only these drugs that--and it's such a 
peculiar way you do it. I don't know how you can say that 
Medicare will set a price and it's irrespective of the price 
that the drug actually costs.
    Mr. Emanuel. That is not what I said. Sorry. Maybe I was 
unclear.
    Mr. Brown. Tell me again. I'm sorry. I misunderstood you.
    Mr. Emanuel. In managed care, patients are--they have 
copays of $5 and $10. They are unrelated to the price of the 
drug.
    Mr. Brown. The copay?
    Mr. Emanuel. And Medicare is different in that it makes the 
copay related to the price of the drug.
    If you want to make Medicare like managed care, then you 
fix the copay independent of the price of the drug.
    Mr. Brown. I didn't say I wanted to make Medicare like 
managed care in that way.
    If, in fact, managed care has done what this article might 
suggest it will have done in the next couple of years, starting 
back 4-plus years ago, then we might be able to use that as a 
real price for these drugs. If that, in fact, is what these 
drugs cost from the manufacturer that managed care is paying 
for, then we might be able to talk more about Chairman Tauzin's 
20 percent of that figure rather than 20 percent of the AWP 
figure.
    Mr. Emanuel. I'm not an expert on managed care pricing 
either, but let me just say one other thing.
    One of the problems is that if you go to managed care and 
talk to them--and one of the other things I do in my head is 
talk to them about these things--they don't have a price for 
the drug. Just like manufacturers play around with prices to 
doctors and to pharmacies, they play around with drugs to 
managed care, so if you buy three of our drugs, we'll give you 
this kind of discount.
    If you're only putting one on the formulary--so there is no 
such thing as ``the price of a drug.''
    Mr. Brown. We know that, and particularly when--in light of 
the fact that Americans, out of pocket, pay about twice as much 
as what managed care companies on the average pay for the cost 
of prescription drugs.
    So, so be it. Thank you.
    Mr. Greenwood. The time of the gentleman has expired.
    The gentleman--the chairman, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Dr. Norton, let me see if I can help understand this a bit 
better, and maybe you can give us some history--a bit. In terms 
of the way the different physician groups negotiate with CMS, 
formerly HCFA, for their reimbursement for practice expenses, 
would oncology groups actually go in and make a case for the--
all of the expenses you indicated were not now covered?
    Mr. Norton. Absolutely for----
    Chairman Tauzin. Have you made that case over the years?
    Mr. Norton. If we are asked to. We have offered it. We have 
offered to do that, and they have said that we'll call you when 
we need you, but we are still waiting for the phone call.
    Chairman Tauzin. You've never had the opportunity to make a 
case on what your true practice expenses are?
    Mr. Norton. That is exactly right.
    Chairman Tauzin. So are you telling me that HCFA, in the 
past, was just not interested in hearing from you on those 
numbers?
    Mr. Norton. Again, what CMS or HCFA previously has done 
is--you know, they will have to tell you that.
    I do tell you, we are very anxious to help in trying to 
determine these costs. We have offered it, and we've been told 
that we will be called when they need us.
    Chairman Tauzin. Staff is advising me that every physician 
group has the right on a yearly basis to submit data to refine 
the practice reimbursement costs. Have oncologist groups taken 
advantage of that opportunity under the law?
    Mr. Norton. The--my understanding is that it's done sort of 
collectively, but that oncologists are clearly, you know, part 
of a very large number of physicians that--you know, that do 
this. But my organization, ASCO, the American Society of 
Clinical Oncology, has offered on many occasions to help in 
determining these costs, and we're still very willing to do 
that.
    Chairman Tauzin. Mr. Scanlon, you're here. Could you help 
us with that process?
    I mean, my understanding is that every group can come in 
every year and do that. If Dr. Norton has said they really 
haven't had that opportunity, I'd like to know why not and 
what's wrong with the process.
    Mr. Scanlon. Groups do have the opportunity to come in 
individually. There has been additional information that's been 
incorporated in the practice expense that comes from the 
American Medical Association's survey of all specialties, but 
individual specialties--and thoracic surgery is one that has 
submitted data of its own--it involves doing a survey of its 
practices.
    Chairman Tauzin. So they weren't invited to do it? They did 
it on their own?
    Mr. Scanlon. Congress gave them the right to do this in the 
Balanced Budget Reform Act.
    Chairman Tauzin. So the question, Dr. Norton, is why 
haven't oncologists on their own submitted data to have the----
    Mr. Norton. We have offered and we have been told that we 
will be contacted when it's appropriate for us to give the 
information; and we're still willing.
    Chairman Tauzin. What I'm hearing is that you don't have to 
offer to do it. You have a right to do it. You don't have to 
have an invite from them. You don't have to make an offer that 
is accepted. The law says that every year every specialty of 
practice has a right to submit new data, revised data, to ask 
the agency to revise the reimbursement under the pool. And my 
question is, why haven't you done that?
    Mr. Norton. We have had contact with numerous agencies, and 
we've offered our assistance in determining these prices. 
There's issues in costs, in fact.
    Chairman Tauzin. Well, you tell me what you did, but you're 
not telling me why you didn't do what you could do. So let me 
say it again as clearly as I can.
    If you have the right to submit it without an invitation, 
if the law gives you the right every year to go to CMS now and 
say, these are our numbers on what it takes to properly 
reimburse us for practice expenses, why haven't you done that?
    Mr. Norton. Well, part of it is that it's an expensive 
proposition to do it properly, frankly. It's--we are a 
voluntary organization, and it's a very expensive proposition 
to do that.
    Chairman Tauzin. But I don't understand that. If you're 
being so underreimbursed, why would--if other companies have 
done that, why wouldn't you do that?
    Mr. Norton. You know, we didn't create AWP; we inherited 
AWP. You created AWP, and the fact is, it's been working. It's 
a broken axle, broken wheel, but it's been working.
    Chairman Tauzin. I thought that was the answer, because 
that is our suspicion. The reason why we've never gotten a real 
definitive, you know, resolution of what the true practice 
costs are in some of these fields is that you felt comfortable 
with the AWP reimbursement as taking care of whatever 
deficiencies exist. Right?
    Mr. Norton. We haven't felt comfortable with AWP. We've 
been opposed to the whole concept ethically, morally.
    Chairman Tauzin. I'm just saying in terms of the dollars.
    Mr. Norton. The economics have worked. We're able to keep 
the ship afloat.
    Chairman Tauzin. So that if you didn't have the advantage 
of the overreimbursements under AWP, you would probably be more 
likely to do what other specialty groups have done every year, 
and that is get in there and pitch a case for why you want to 
be reimbursed more thoroughly for your practice expense?
    Mr. Norton. We absolutely would help determine the proper 
reimbursement, absolutely.
    Chairman Tauzin. Now, recognizing that that hasn't happened 
and recognizing that if we do eliminate this practice of 
overreimbursing for drugs, which some specialty groups, like 
your own, have relied on upon rather than seeking changes in 
that pool, if we did that, you would--is there any doubt you 
would head straight to that pool and seek a reassessment of 
your practice expenses?
    Mr. Norton. Oh, we would like to work to make a fair cost. 
Absolutely. Sure.
    Chairman Tauzin. And would it be helpful if we had your 
cooperation and the cooperation of other groups, specialty 
groups, affected, in eliminating this practice of the AWP--
because it has other pernicious effects, not just this 
financing thing--if we got rid of it, would it be helpful if we 
asked you to work with GAO and the IG and Scully and our own 
committee to determine what is, in fact, a fair estimate of 
what practice----
    Mr. Norton. It would not only be helpful; it would be 
wonderful. We would relish that opportunity.
    Chairman Tauzin. If we told you in advance that we were 
prepared, and this committee was able, to support additions to 
the fund so that, in fact, there would be less pressure on you 
having to go get your dollars from some other practice group, 
but there would be room to make up a reasonable--in a 
reasonable way, commensurate with what other practice groups 
are getting--I'm not saying that we should favor one practice 
group over another in that process, but to give more room for 
you to adequately get a reevaluation of your practice----
    Mr. Norton. See, again----
    Chairman Tauzin. Would such a proposal meet with your 
support?
    Mr. Norton. Yes. It sounds great. Frankly, you know, the 
point is that we're not talking about consultation costs or 
visit costs. We're talking about actually--the cost of actually 
treating patients, the cost to treat patients. Any solution 
that enables us to be able to continue to treat our patients is 
a solution we'd be happy----
    Chairman Tauzin. That is the solution we want. When we 
started this discussion, the chairman will tell you we had 
briefings, and I, among a number of members, made it very clear 
that if we're going to do this, if we're going to take this on, 
this massive project to change this, when 10 years have gone by 
and nobody could do it, that the one outcome we could not have 
is that somehow you were not going to be out there taking care 
of cancer patients as a result. And then that's your leverage 
in this thing. We understand that.
    But our leverage is that--I want you to understand this. 
Our leverage is that I don't think patients in America, upon 
learning that they're paying a 20 percent copay that is equal 
to 500 percent of the cost of a drug that the doctor buys--I 
don't think patients in America are going to let anybody put up 
with this system, now that that's out in the open; and that 
patients are gradually going to understand how bad that is.
    I mean, when my 82-year-old mom hears that she has to pay a 
20 percent copay that's equal to five times what the doctor is 
charged for the drug, I can tell you, I'm going to get a few 
phone calls from that lady, and I suspect every Member of 
Congress would. And if there were a legislative stand-alone 
proposal to change that, it probably would zip through this 
Congress.
    So I guess my message is that we understand, I think, the 
problem of how we've gotten in this mess. I also want to say 
this again. I think you're the angels sent from God for the 
work you do, and I know why you're having a hard time 
recruiting in some cases.
    It's so awful to watch people go through what people go 
through in cancer, and you guys do it all the time, and I 
admire you so much for that. I want you to understand that.
    We understand the problem you're in, but we need your help 
to fix it. And if we're going to come up with a formula that 
works, we're going to need all the specialty groups working 
with us to come up with a solution that answers it. If we 
don't, we're going to end up having to sell parts of it at a 
time, like this 20 percent copay thing, and that's not going to 
be good. That's just going to take a chunk out of income.
    But, in fairness, I can't see asking my mom or anybody else 
to pay 500 percent for some--for the cost of some drug, when 
the law says they ought to pay 20 percent of it. There's 
something wrong there.
    Bottom line, I guess what I'm saying is, I think we're 
seeing our way to some solutions, but we're going to need the 
support, help and encouragement of the provider groups, such as 
yours, in finding it in a way that you continue and can 
continue to serve America's cancer patients; and at the same 
time that we can put an end to this system, not simply because 
it may be wrong financially, but because it has some potential 
aspects to it that are so disturbing.
    To think that the bonus paid for chemotherapy might 
encourage anybody to use it when it's not appropriate is just 
an awful thought, and I hope it does--I hope it is not 
happening in America. But the thought that it could is just so 
disturbing, that I think we have to--we have to deal with this 
pretty soon.
    And so, again, thank you for your contributions today, all 
of you, and I hope we--I want to do one more thing, if I can, 
Mr. Chairman. I want to turn to Dr. Emanuel.
    What is a nonresponsive chemo situation? You named a bunch 
of cancers. Tell us what that means. That means that chemo 
doesn't help at all?
    Mr. Emanuel. Right. The chemotherapies we have available do 
not shrink the cancers.
    Chairman Tauzin. Do they help with the patients in any 
other way?
    Mr. Emanuel. Usually they are not recommended when they 
don't shrink the cancer.
    Chairman Tauzin. Well, that's what I'm having a hard time 
understanding. Why in the Massachusetts study did you--and 
maybe, Dr. Norton, you can help me.
    Mr. Norton. I can help you.
    Chairman Tauzin. Why did you find that doctors were doing 
chemotherapy on patients when chemotherapy was known not to 
work?
    Mr. Norton. Generally speaking, we define ``responsive'' as 
about a 20 percent response rate. But somebody who is desperate 
will take less than a 20 percent response rate, and that's--
frankly, I think it's one cycle. You say, Listen; the patient 
says, Listen, Doctor, please try.
    Chairman Tauzin. Very often, it's a patient saying, I don't 
want to----
    Mr. Norton. I spent 45 minutes with the daughter of a 
patient this morning before I came here. She was begging me to 
treat her mother with chemotherapy, and I frankly said I didn't 
think it was appropriate.
    Chairman Tauzin. So I just----
    Mr. Norton. One cycle is what Dr. Emanuel found in his 
study. You know, when a patient comes in, desperate, and says, 
Please try; and you can find in the medical literature 5, 10 
percent response rates in all these diseases to various--you 
say, We will try one cycle; if the cancer doesn't shrink, we 
will stop. And frankly I don't think that is so unreasonable. 
You know, you say the last 6 months, the last 3 months of life; 
you don't know that until a patient has died. If they respond 
to therapy, it's no longer 3 months.
    Chairman Tauzin. I'm trying to help you. So the fact is 
that the bonus that exists in this reimbursement system may not 
be the reason why even in a nonresponsive cancer case chemo is 
selected, because the patient may want it in some cases.
    Is that right, Dr. Emanuel? Do you agree with that?
    Mr. Emanuel. Yes. I think that's--we've all experienced 
that situation.
    Chairman Tauzin. Thank you very much, Mr. Chairman.
    Mr. Greenwood. The gentleman's time has expired.
    The gentleman from New York, Mr. Engel, is recognized for 5 
minutes.
    Mr. Engel. Well, thank you, Mr. Chairman.
    If this was another hearing in talking about Medicare and 
reimbursements and what Medicare pays for, I'd be talking about 
how Medicare can pay for syringes but not for the drug insulin 
to--which is used in the syringes. I'm constantly confused by 
what goes on.
    But since we're talking about home infusion, infusion 
therapy, I want to talk a little bit--and I thank you, Mr. 
Connaughton, for mentioning it in your testimony. I want to 
highlight my bill, which is H.R. 2750. We called it the 
Medicare Home Infusion Therapy Act, and what it does is it 
addresses the particular problems associated with home infusion 
therapy.
    Medicare's reimbursement policy for home infusion therapy 
is simply outdated. Modern medicine has made the administration 
of many drugs safe and effective in the home. Because of these 
ridiculous reimbursement provisions, many senior citizens are 
forced to stay in hospitals or trek to physicians' offices on a 
daily basis to receive their treatment, when this treatment can 
be given to them in their homes.
    It's much cheaper. It's much easier for everyone around, 
and yet we can't do that. It can be conducted in the home 
safely, and it could be at a fraction of the cost.
    So, to address that issue, the bill directs the Secretary 
of Health and Human Services to set up a fee schedule for drug 
reimbursements and provider reimbursements that would ensure 
adequate and fair payments to providers. I very strongly feel 
that this legislation appropriately addresses the needs of 
seniors and providers together and could serve as a model for a 
broader approach to the problems with AWP, and I'm hoping that 
we as a committee will examine the legislation.
    Mr. Connaughton, since you mentioned it, I'm wondering if 
you could expand on some of your remarks, because as I 
mentioned, the bill doesn't only reform how currently covered 
home infusion drugs are regulated, but it would also extend 
coverage to drugs that are not currently covered, such as home 
antibiotic therapy; and I wonder if you could just talk about 
that expansion. And what do you think this bill would do for 
Medicare beneficiaries?
    Mr. Connaughton. Let me just make a couple of comments.
    First of all, I think your bill is absolutely consistent 
with the five principles the chairman enunciated earlier when 
he was speaking with Mr. Scully. Medicare, as I've mentioned in 
my testimony, is losing the advantage of infusion therapy in 
the home. The coverage by Medicare for home infusion is 
extremely narrow. Managed care is taking advantage of that 
opportunity, and indeed Medicare's use of home infusion is less 
than 20 percent of what home infusion companies do.
    There are many therapies that are not covered by Medicare 
now that could be covered by Medicare and are covered by 
managed care in the home. It would make tremendous savings.
    The key to your bill I think, Mr. Engel, is that it spells 
out a reimbursement scheme and recognizes that these services 
are a value in the home, but it spells out a reimbursement 
scheme that is based upon costs of a product and the costs of 
the services and recognizes that there are standards for those 
services that are recognized in the private sector; and we 
think it's a very, very good piece of legislation.
    Mr. Engel. Thank you.
    Let me ask you this: If Medicare were to adopt the same 
quality standards that are used in the private sector, how do 
you think this would affect the care provided to Medicare 
beneficiaries?
    Mr. Connaughton. Well, it would ensure they are getting the 
same quality of care that they're getting in the private 
sector. In the private sector there are standards; they spell 
out the services. Medicare, for whatever reason, just does not 
recognize that these services exist; and I think it's important 
for them to recognize them and spell out the standards.
    Mr. Engel. And as things have evolved in health care--
obviously, when Medicare was first put into place, we couldn't 
have anticipated the changes and the improvements we've made, 
and therefore I think it's fair to say--and I'm sure you would 
concur--that we need to change some of the--to update, I think 
that's a better word, some of the procedures that we have now.
    Mr. Connaughton. I would agree with that.
    In the case of home care, technology is going to allow us 
to do a lot more things. Infusion therapy is a current issue, 
but I hope over time that Medicare will be able to take 
advantage of those technologies.
    Mr. Engel. Now, I want to make sure that I understand 
something you mentioned earlier. I think the chairman also--I'm 
sorry. Mr. Brown, I think, mentioned it before.
    The costs of acquiring the drug for home care suppliers are 
in many cases less than the cost of administering it.
    Mr. Connaughton. That's the case. On average--it varies 
from therapy to therapy, but on average, our survey that was 
conducted, about 26 percent of the cost of providing the 
therapy is the drug.
    Mr. Engel. So obviously that is something we need to fix. 
I'm sure that's why Mr. Brown mentioned it, and I think it's 
something that the committee ought to look at.
    I'm wondering if anyone else would want to comment on that. 
Yes.
    Ms. Lamphere. Indeed, the services that you were talking 
about and the quality standards that you were talking about are 
very important. The nursing coordination, the patient 
education, the pharmacy operations, all of these direct 
services, at least in the case of home infusion and respiratory 
therapy, account for 46 percent of the total cost of providing 
respiratory and home infusion services in the home.
    Mr. Engel. Yes. I think that's a shocking statistic, and I 
certainly think it shows that things are broken and need to be 
fixed. I thank you.
    Thank you, Mr. Chairman.
    Mr. Greenwood. I thank the gentleman.
    The gentleman from Iowa, Mr. Ganske, for 5 minutes.
    Mr. Ganske. I thank the members of the panel for staying 
for a long day.
    I think that there's been a consensus today, from the 
previous participants, that the way that we've calculated 
reimbursement for drugs and Medicare needs to be made more 
accurate, and that we need to take into account the true costs 
of the administration and the services to get those drugs to 
the patients. And I think your testimony has been effective. I 
thank you and I yield back.
    Mr. Greenwood. The gentleman, Mr. Norwood for 5 minutes.
    Mr. Norwood. Thank you, Mr. Chairman. I will be relatively 
brief, but I'm interested in a couple of things.
    Dr. Norton, you listed in your testimony a number of 
services that clearly the oncologist has to perform for the 
patient if they are to get good care. Those services presently 
are not recognized by Medicare.
    Mr. Scanlon, I'm curious, since the GAO seems to know a lot 
about this subject, why aren't--well, let me go back a minute. 
You said, ``not explicitly.'' That means no, I gather.
    Mr. Scanlon. No, it doesn't. Excuse me. Not recognized, but 
paid for. And the difference is that the way that Medicare 
practice expense fees are determined is that all the costs of 
the practice are taken into account, so presumably these kinds 
of activities generate costs which are carried on the books; 
and those should be taken into account when practice expense 
payments are determined.
    Mr. Norwood. Dr. Norton, do you believe that that is 
actually the case?
    Mr. Norton. You know, I am an expert in statistics; that, I 
am, even though I'm not an expert in economics. And my 
understanding is that the methods that are used to actually 
make these determinations are filled with approximations. It's 
approximation upon approximation--approximation of expense, 
approximation of time, calculations, multiplications of 
submitted procedures and various percentages.
    I question, just as a scientist--and I'm not an economist. 
As a scientist, I question the validity of some of these 
methods, frankly.
    I would like to see a method that starts with the actual 
procedure and builds up and calculates the cost on that basis. 
You know, if it's going to be a half an hour of somebody's time 
to talk to a patient, then it should be a half an hour of this 
hour that's reported into the equation, and that's the way it 
ought to be calculated.
    If we do it that way, we very well might come up with a 
different number. And I'm not even saying that I know for sure 
we'll come up with a different number. I just think that the 
science of actually coming up with the cost estimates could be 
improved.
    Mr. Norwood. Well, Mr. Scanlon, and then you.
    It appears that the providers of this care, though their 
services aren't listed, feel that they aren't compensated. 
That's fairly clear to me.
    Now, Mr. Scanlon, I presume that a lot of your numbers are 
the result of estimations.
    Mr. Scanlon. The numbers are based upon samples, samples 
both of the practices in terms of reporting their actual costs 
that they incurred; and then panels of experts that were put 
together, doing what Dr. Norton suggested, which is to take for 
each procedure and to say, this is our estimate as to how much 
nurse time, how much other staff time, how much supplies, et 
cetera, it takes to provide that procedure.
    The flaw that was discovered in that method is, when you 
add it up, for all of the times and all of the different costs 
that the panels had, they didn't match the data that the 
practices were actually writing checks for. And that's why it 
was critical to bring both of these pieces of information 
together.
    Think of it in terms of, if we were all asked to tell 
everyone how we spent yesterday, give every activity that you 
were engaged in and the amount of time, it might not add up to 
24 hours, but there were still only 24 hours in yesterday. And 
the problem is, it's very hard in the abstract sense to say 
this is going to take 50 minutes, this is going to take an 
hour, et cetera. So the data of costs that practices actually 
incur is a very good and strong benchmark in terms of being 
able to calibrate these expert panel estimates.
    I agree with Dr. Norton, in a sense, that the data need to 
be improved. We need to get data that are going to be more 
robust, have smaller variance in terms of the estimate of the 
true values. I don't agree that the method is invalid.
    The method is valid. We just need better information with 
which to execute it.
    Mr. Norwood. Well, isn't it then true that perhaps the 
reason we are having this hearing is, the data is not robust, 
as you put it? As far as I know, the oncologist did not come up 
with a plan for how to be reimbursed in terms of the cost of 
drugs. I presume that our old agency, HCFA, dreamed that up.
    Mr. Scanlon. There are two elements; I mean, in terms of 
why we may be having this discussion. One is data, and we--and 
I've talked about that. The other that I mention in my 
testimony is the fact that the method that I'm saying is valid, 
the method I think that needs to be applied for all 
specialties, is not the method that was used to calculate the 
fees for chemotherapy administrative services, as well as for 
other services where there's not direct physician involvement.
    We believe that CMS needs to calculate all fees, using what 
we've referred to as the basic method, which in our mind, 
appropriately allocates total practice expenses across the 
procedures that specialties have, takes into account to the 
greatest extent possible differences in the costs of delivering 
a service by one specialty versus another.
    Oncology, again, is affected by what HCFA did in the past. 
It took the chemotherapy administration services and put them 
in a pool with all other similar types of services from other 
specialties and calculated fees on the basis of that average. 
We don't think that is appropriate.
    So if we were to apply the method appropriately, we would 
get a different result. It's the chemotherapy fee--
administration fees would change 16 percent; overall fees to 
oncologists would change 7 percent. So those are the kinds of 
things that we have been talking about.
    Mr. Norwood. Dr. Norton, I heard Chairman Tauzin say that 
he knew that Mr. Scully would be greatly interested in your 
organization's input, and I know you're interested in doing 
that. You're president of your society, are you not?
    Mr. Norton. That's right, sir.
    Mr. Norwood. How many members do you have?
    Mr. Norton. About 17,000.
    Mr. Norwood. American Society of Clinical Oncology.
    What is your pay as president?
    Mr. Norton. Oh, I don't get any pay at all. This is 
voluntary. My institution gets some money--I actually don't 
even know the amount--to compensate partially for the time I 
spend. But since I spend essentially 100 percent of my time 
doing this job as well as 100 percent doing my other job, it's 
nowhere near compensation. I receive no funds whatsoever.
    Mr. Norwood. So I want to point out to our chairman that 
you are a volunteer organization, and sometimes it is not as 
simple as it seems when a voluntary organization is asked to 
defend itself against a Federal organization--a Federal agency 
that has thousands and thousands of employees who sometimes 
don't get in a hurry.
    I may be wrong about that, but a lot of times it's very 
difficult on the other end to do what we're asked to do.
    And I don't frankly understand, for example, why CMS 
doesn't list the services and determine, with the help of 
people like Dr. Norton, what a fair, reasonable fee is, and 
make it so much simpler for everybody; rather than putting the 
onus on the back of a volunteer organization, oh, it's all your 
fault because you're not being reimbursed.
    I know I'm running out of time. I've got two quick things, 
Mr. Chairman, if I could finish.
    Mr. Scanlon, just yes or no. Do you happen to know, is it 
GAO that told President Johnson that the cost of Medicare in 
1990 was going to be $9 billion?
    Mr. Scanlon. No.
    Mr. Norwood. Okay. Just checking. I know one of the 
agencies did. I just can't remember which one.
    Dr. Emanuel, God forbid if you should ever have cancer, 
where would you choose to be treated?
    Mr. Emanuel. Think it depends on the kind of cancer. I 
would try to find the right oncologist for the cancer.
    Mr. Norwood. Would you prefer to be treated in the United 
States?
    Mr. Emanuel. Well, certainly compared to other--certain 
other countries which are struggling.
    Mr. Norwood. You implied that our oncology care in America 
is pretty poor and listed reasons why you thought perhaps they 
were poor, and I wondered if that's what you meant to imply.
    Mr. Emanuel. No. I think what I said, or certainly what I 
meant to say, is that we at this moment cannot guarantee every 
American who has cancer the highest quality oncological care 
for that cancer. We know that there are problems. We know that 
there is underuse and we know that there is overuse, and part 
of the issue is to make sure that we can guarantee everyone 
that they get the right care at the moment.
    Mr. Norwood. We can't guarantee everyone we can stay out of 
the way of an airliner. How can we guarantee everyone?
    Mr. Emanuel. Well, we don't even have a monitoring system 
to make sure that Americans do----
    Mr. Norwood. And who do you want to determine who gets the 
care, if you don't want the people who are trained in oncology 
to determine it?
    Mr. Emanuel. I think we need----
    Mr. Norwood. Some oncologists decided a patient shouldn't 
get the treatment, or should. Okay. If you don't like them 
deciding, who do you want to decide?
    Mr. Emanuel. I'm--at the moment, I certainly think 
oncologists have to be part of it. I'm actually at the moment 
the head of the ASCO Task Force on the Quality of Cancer Care. 
One of the things I think we do need is to have a monitoring 
system to make sure that people who are diagnosed with cancer 
get referred to the right person, get the right procedures, not 
too much and not too little, and who----
    Mr. Norwood. Who is ``we''?
    Mr. Emanuel. I think that's a collective responsibility, 
and as a matter of fact, ASCO, the American Society of Clinical 
Oncology, has undertaken a $5 million study to try to find out 
where the flaws in the system are. We know that there are flaws 
in the system and that it's not working perfectly; and I think 
it would be wrong at this point in time to say, just because 
I'd like to be treated in the United States, that we have a 
flawless system.
    We know we have quality problems, and we know we need to 
have oversight and to improve the quality of cancer care 
delivery. The issue is, where are the problems, how can we 
monitor them, and how can we collectively--oncologists, the 
government, nurses, hospitals, insurers--improve that system.
    Mr. Norwood. I see the red light, Mr. Chairman.
    Mr. Greenwood. The time of the gentleman from Georgia has 
expired. I thank the gentleman for his questions, and let me 
advise the gentleman from Georgia that it is my intent, in the 
legislation that we introduce, to fix this problem; that we 
will, in fact, direct CMS to do the work with these 
associations, but certainly to provide the technical support so 
that we can develop the data, so that they are adequately 
compensated. And that will not be a burden placed on the backs 
of the voluntary organizations exclusively.
    Mr. Norwood. And, Mr. Chairman, if the organization has a 
white paper on--at least their opinion on how to go about 
fixing the problem, shouldn't at least CMS have a white paper 
on how they think the problem ought to be fixed?
    Mr. Greenwood. Well, we're going to make them work so fast 
that they won't even have time for a white paper.
    The Chair asks unanimous consent to submit for the record 
the following documents: two volumes of committee documents; 
the opening statements of--the statements submitted by 
Congressman Stark and other members' opening statements; two 
letters to the committee from U.S. Oncology, clarifying the 
documents obtained by the committee.
    And I would ask unanimous consent that we hold the record 
open for members to submit questions.
    With that, we thank the final panel for your testimony, for 
your presence, for your endurance as well. This committee does 
intend to fix this problem. We intend to fix it in short order. 
We intend to fix it rationally and fairly for the benefit of 
the taxpayers, the beneficiaries and the valued health care 
providers. Thank you.
    The committee hearing is adjourned.
    [Whereupon, at 3:15 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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