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


 
       MEDICARE PAYMENTS FOR CURRENTLY COVERED PRESCRIPTION DRUGS
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 3, 2002

                               __________

                           Serial No. 107-84

                               __________

         Printed for the use of the Committee on Ways and Means







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83-923                         WASHINGTON : 2002
___________________________________________________________________________
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

JIM McCRERY, Louisiana               FORTNEY PETE STARK, California
PHILIP M. CRANE, Illinois            GERALD D. KLECZKA, Wisconsin
SAM JOHNSON, Texas                   JOHN LEWIS, Georgia
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               KAREN L. THURMAN, Florida
PHIL ENGLISH, Pennsylvania
JENNIFER DUNN, Washington

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.















                            C O N T E N T S

                               __________
                                                                   Page
Advisory of September 26, 2002, announcing the hearing...........     2

                               WITNESSES

Centers for Medicare & Medicaid Services, Hon. Thomas A. Scully, 
  Administrator..................................................     9
U.S. Department of Health and Human Services, Office of Inspector 
  General, Centers for Medicare and Medicaid Audits, George Reeb, 
  Assistant Inspector General; accompanied by Robert Vito, 
  Regional Inspector General, Evaluation and Inspections, 
  Philadelphia, PA...............................................    40

                                 ______

American Society of Clinical Oncology, and University of 
  Colorado, Cancer Center, Paul Bunn, M.D........................    46
Medical Rights Center, Kim Glaun.................................    61
PacifiCare Health Systems, Inc., and Prescription Solutions, John 
  D. Jones.......................................................    56
Project HOPE, Michael J. O'Grady.................................    50

                       SUBMISSIONS FOR THE RECORD

American Association for Homecare, statement.....................    75
American College of Rheumatology, statement......................    89
American Society of Nuclear Cardiology, Kansas City, MO, Timothy 
  M. Bateman, M.D., statement....................................    80
American Society for Therapeutic Radiology and Oncology, Inc., 
  Laura Thevenot, statement......................................    74
Association of Freestanding Radiation Oncology Centers, Peter 
  Blitzer, M.D., statement.......................................    81
National Alliance for Infusion Therapy, and National Home 
  Infusion Association, Alexandria, VA, statement................    82
Oncology Nursing Society, Pittsburgh, PA, Judy E. Lundgren, and 
  Pearl Moore, letter and attachments............................    84

















       MEDICARE PAYMENTS FOR CURRENTLY COVERED PRESCRIPTION DRUGS

                              ----------                              


                       THURSDAY, OCTOBER 3, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:38 a.m., in 
room 1100 Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
September 26, 2002
No. HL-18

                      Johnson Announces Hearing on

                Medicare Payments for Currently Covered

                           Prescription Drugs

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on pricing mechanisms for drugs 
covered under the Medicare program. In addition, the hearing will 
examine physician reimbursement for administration of these 
prescription drugs. The hearing will take place on Thursday, October 3, 
2002, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 a.m.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include the Administrator of the Centers for Medicare 
and Medicaid Services (CMS), academics, and providers. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.

BACKGROUND:

    Medicare does not cover most outpatient prescription drugs. 
However, it does cover certain categories of outpatient prescription 
drugs, including drugs used in dialysis, organ transplantation, cancer 
treatment, and certain drugs used with durable medical equipment, such 
as infusion pumps and nebulizers. According to the U.S. General 
Accounting Office, about 450 outpatient drugs are covered under these 
categories. Medicare payments for covered drugs have skyrocketed, 
increasing beneficiary and taxpayer costs, and driving potentially 
inappropriate clinical decisions.

    In 1992, Medicare paid about $700 million for prescription drugs; 
eight years later, it paid $5 billion. (Between 1999 and 2000, payments 
increased by $1 billion.) In addition, just 35 drugs account for 82 
percent of Medicare spending and 95 percent of the claims volume.

    The Balanced Budget Act of 1997 (P.L. 105-33) specified that 
Medicare payment for covered outpatient prescription drugs would equal 
95 percent of the average wholesale price (AWP) for the drug. AWPs, 
however, are not defined by law or regulation. The AWPs are reported by 
drug manufacturers to organizations that publish the data in compendia. 
Medicare carriers use the published data in calculating payment for 
Medicare covered drugs, but AWPs are not grounded in any real market 
transaction, and do not reflect the actual price paid by purchasers. 
The AWP for a product is often far greater than the acquisition cost 
paid by suppliers and physicians. In addition, AWPs do not reflect the 
discounts, rebates or ``charge backs'' that manufacturers and 
wholesalers customarily offer to providers. Therefore, AWPs represent 
neither average prices nor prices charged by wholesalers.

    Medicare pays an excessive amount for covered drugs. The U.S. 
Department of Health and Human Services Inspector General found that 
Medicare beneficiaries and taxpayers could save more than $200 million 
on one drug alone--albuterol, an inhalation therapy drug--if the drug 
were reimbursed at prices available to commercial purchasers. Moreover, 
a higher AWP creates a higher beneficiary copayment and premium, 
because beneficiaries are responsible for a copayment equal to 20 
percent of Medicare's payment for the drug. In some cases, the 
beneficiary's copayment is greater than the physician's or supplier's 
actual total cost for the drug.

    Some manufacturers reportedly use inflated AWPs as a strategy to 
increase market share. Physicians and suppliers are reimbursed based on 
the inflated AWP, but actually pay much less to acquire the drug. The 
larger the ``spread'' between the actual price and 95 percent of the 
AWP, the greater the incentive to use the product. This inappropriately 
influences clinical decisions and may harm patient care, while driving 
over-utilization of services.

    Some physicians have expressed concerns about lowering Medicare 
reimbursements for prescription drugs. They assert that they are under-
reimbursed by Medicare for their costs in administering the drugs, and 
claim that the overpayments for drugs to cover their practice expenses. 
Oncologists, for example, argue that Medicare does not adequately 
reimburse them for the practice expenses associated with providing 
treatment to cancer patients in outpatient settings.

    There is little rationale for using Medicare overpayment for drugs 
as a mechanism to reimburse physicians for practice expenses. Medicare 
has a well-defined procedure for examining the adequacy of physician 
payments under the physician fee schedule. As provided for under the 
Benefits Improvement and Protection Act, oncologists recently submitted 
results from a new survey on practice expenses to CMS as part of this 
review. Because any increase in practice expense reimbursements to one 
specialty, such as oncology, must be budget neutral under current law, 
other specialties would experience decreases in their practice 
expenses, unless Congress were to provide new money to recognize these 
practice costs.

    In announcing the hearing, Chairman Johnson stated, ``The AWP 
process is seriously flawed. It's costing Medicare beneficiaries and 
taxpayers too much because Medicare is paying inflated prices. We must 
inject competition into the program to bring market forces to bear on 
reimbursement for drugs. The Administration says that they will fix the 
problem if Congress does not act, but it will take congressional action 
to ensure that our seniors continue to have access to high-quality 
cancer care.''

FOCUS OF THE HEARING:

    Thursday's hearing will highlight problems with the AWP system for 
determining Medicare reimbursements for currently covered prescription 
drugs, and examine alternative mechanisms for determining Medicare 
payments.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Thursday, October 17, 2002. 
Those filing written statements who wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the Subcommittee on Health in room 1136 
Longworth House Office Building, in an open and searchable package 48 
hours before the hearing. The U.S. Capitol Police will refuse sealed-
packaged deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event 
(four business days notice is requested). Questions with regard to 
special accommodation needs in general (including availability of 
Committee materials in alternative formats) may be directed to the 
Committee as noted above.

                               

    Chairman JOHNSON. Good morning. This morning's hearing is 
very important in our effort to strengthen our Medicare 
Program. The evidence is overwhelming that Medicare is paying 
way too much for some items of durable medical equipment (DME) 
and prescription drugs. It is imperative that we adopt a system 
that more accurately aligns costs and payments.
    While this would not normally be a difficult task, it is a 
very difficult problem at this time because most cancer care is 
paid for through drug reimbursements. This means that as we 
change the way we pay for drugs, we must also realistically and 
accurately reimburse for the practice expenses associated with 
the delivery of, for example, chemotherapy. These practice 
expenses are significant--personnel, special equipment, costly 
drug inventories and insurance to cover them, and so forth.
    So assuring reimbursement for practice expense is no easy 
task, yet it has been only a minor part of the average 
wholesale price (AWP) discussion. The U.S. General Accounting 
Office (GAO) tried identifying practice expenses, but neglected 
to focus its work appropriately on oncologists who deliver such 
care in an office setting. The oncology community was slow, as 
well, to rise to this quite daunting task.
    However, now we are developing the needed information. 
Today we are unified in our quest to change the way we pay for 
Medicare-covered drugs and the way we pay for the costs of 
administering those drugs.
    While I am keenly disappointed in the GAO study, I am 
pleased that the oncologists have taken advantage of a 
provision I wrote in the Benefit Improvement and Protection 
Act. The provision permits groups to submit practice expense 
data and requires the Centers for Medicare & Medicaid Services 
(CMS) to evaluate that data and use it if it meets certain 
standards. The most recent data is very important and 
particularly significant because of our earlier failure to 
collect appropriate information.
    Overpaying for drugs burdens seniors with copayments that 
in some instances exceed the cost paid for the drug by the 
physician, pharmacist, or provider of durable medical 
equipment. On the other hand, underpayment will, without 
question, deny seniors access to life-saving care.
    Medicare spending on part B drugs is very concentrated. 
Just 35 drugs account for 82 percent of Medicare spending, and 
95 percent of the claims volume. Furthermore, Medicare payments 
for covered drugs have skyrocketed, increasing beneficiary and 
taxpayer costs. In 1992, Medicaid paid about $700 million for 
prescription drugs. In 2000, it paid $5 billion, a 700-percent 
increase over 8 years.
    Medicare's payment for these drugs is prescribed in law. 
The Balanced Budget Act 1997 specifies that Medicare pay 95 
percent of the AWP, for the drug. The AWPs, however, are not 
defined by law or regulation. They are reported by drug 
manufacturers to organizations that publish the data in 
compendia, like the Red Book. Medicare carriers use the 
published data to calculate payment.
    The problem is that AWPs do not reflect the actual price 
paid by purchasers. Nor do they accurately account for the 
costs associated with administering the drugs, for which no 
other Medicare payment is made. The AWPs are often far greater 
because they do not reflect the discounts, rebates, or so-
called charge backs that manufacturers and wholesalers 
customarily offer to providers. On the other hand, for cancer 
drugs, they have the costs of inventory, insurance, special 
equipment, nursing, and other personnel that are not captured 
in any other payment.
    Examples of overpayment abound, forcing seniors to bear 
higher copayments and premiums. Beneficiaries pay a copayment 
equal to 20 percent of Medicare's payment for the drug. For 
some drugs, beneficiaries are, indeed, paying more in 
copayments than physicians or suppliers are paying to purchase 
the drug.
    Consider Vancomycin, with an AWP of $382. The beneficiary 
would pay 20 percent, or $73. The provider would pay $5, on 
average. That is a $73 payment by the beneficiary for a drug 
that cost the provider $5.
    Here are just a few examples comparing one company's 2001 
AWP, as reported in the Red Book, and the actual wholesale 
prices determined by the U.S. Department of Justice. 
Vancomycin, the Red Book reported AWP was $382 compared to the 
U.S. Department of Justice actual price of $5, an injectable 
drug. The other two are also injectable. In the interests of 
time, I am going to skip over the details.
    A second and equally serious problem are reports that some 
manufacturers use inflated AWPs as a strategy to increase 
market share. If Medicare reimburses physicians and suppliers 
based on the inflated AWP, providers have a greater incentive 
to use the products with the larger spread. Providers may base 
prescribing decisions on economic incentives rather than 
clinical appropriateness. This practice may harm patient care 
and drive over-utilization of services.
    Of all countries, America has the greatest access to cancer 
care. In recent years, there has been a revolution in cancer 
care, enabling physicians to deliver the latest in quality care 
in many small centers across America. Medicare does not 
reimburse oncologists for the practice expenses associated with 
providing treatment to cancer patients in outpatient settings. 
Consequently, they have come to rely on the overpayment for 
drugs to cover these costs.
    Before we eliminate overpayments, we must assure 
appropriate reimbursement for practice expenses. While all 
agree on this, I am determined it be done accurately and 
fairly. I am disappointed with the relatively small amount of 
attention that has been focused on this issue and will pursue 
it in questioning.
    We are very pleased to welcome the Honorable Thomas A. 
Scully from the Centers for Medicare & Medicaid Services again 
before us, and on our second panel, George Reeb, Michael J. 
O'Grady, Ph.D., Paul A. Bunn, Jr., M.D., John D. Jones, and Kim 
Glaun, whom I will introduce a little bit more at a later time. 
Mr. Stark?
    [The opening statement of Chairman Johnson follows:]
  Opening Statement of the Hon. Nancy L. Johnson, a Representative in 
Congress from the State of Connecticut, and Chairwoman, Subcommittee on 
                                 Health
    Good morning. This morning's hearing is a very important one in our 
effort to strengthen our Medicare program. The evidence is overwhelming 
that Medicare is paying way too much for some items of durable medical 
equipment and prescription drugs. It is imperative that we adopt a 
system that more accurately aligns costs and payments.
    While this would not normally be a difficult task, it is a very 
difficult problem at this time because most cancer care is paid for 
through drug reimbursements. That means that as we change the way we 
pay for drugs, we must also realistically and accurately reimburse for 
the practice expenses associated with the delivery of, for example, 
chemotherapy, and these practice expenses are significant, personnel, 
special equipment, costly drug inventories, and the insurance to cover 
them and so forth.
    So assuring reimbursement for practice expense is no easy task, yet 
it has been only a minor part of the AWP discussion.
    The GAO tried identifying practice expenses but neglected to focus 
its work appropriately on oncologists who deliver such care in an 
office setting. The oncology community was slow as well to rise to this 
quite daunting task. Now, however, we are developing the needed 
information and today, are unified in our quest to change the way we 
pay for Medicare-covered drugs . . . and the way we pay for the costs 
of administering those drugs.
    While I am keenly disappointed in the GAO study, I am pleased that 
oncologists have taken advantage of a provision that I wrote in the 
Benefit Improvement and Protection Act that permits groups to submit 
practice expense data and requires the Centers for Medicare and 
Medicaid Services to evaluate that data and use it, if it meets certain 
standards. Their most recent data is very important and particularly 
significant because GAO failed to collect appropriate data in the study 
we sought for that purpose, though unintentionally.
    Overpaying for drugs burdens seniors with co-payments that in some 
instances exceed the cost paid for the drug by the physician, 
pharmacist, or provider of durable medical equipment. On the other 
hand, underpayment will without question deny seniors access to life-
saving care.
    Medicare spending on Part B drugs is very concentrated: just 35 
drugs account for 82 percent of Medicare spending and 95 percent of the 
claims volume.
    Furthermore, Medicare payments for covered drugs have skyrocketed, 
increasing beneficiary and taxpayer costs. In 1992, Medicare paid about 
$700 million for prescription drugs; in 2000, it paid $5 billion, a 700 
percent increase over 8 years, though the number of drugs used has 
soared as well.
    Medicare's payment for these drugs is prescribed in law. The 
Balanced Budget Act of 1997 specifies that Medicare pay 95 percent of 
the average wholesale price, or AWP, for the drug. AWPs, however, are 
not defined by law or regulation. They are reported by drug 
manufacturers to organizations that publish the data in compendia, like 
the Red Book. Medicare carriers use the published data to calculate 
payment.
    The problem is that AWPs do not reflect the actual price paid by 
purchasers, nor do they accurately account for the costs associated 
with administering the drugs, for which no other Medicare payment is 
made. The AWPs are often far greater because they do not reflect the 
discounts, rebates or so-called ``charge backs'' that manufacturers and 
wholesalers customarily offer to providers. On the other hand, for 
cancer drugs, the heavy costs of inventory, insurance, special 
equipment, nursing and other personnel are not captured by any other 
payment.
    Examples of overpayment abound, forcing seniors to bear higher 
copayments and premiums. Beneficiaries pay a copayment equal to 20 
percent of Medicare's payment for the drug. For some drugs, 
beneficiaries are paying more in copayments than physicians or 
suppliers are paying to purchase the drug.
    Consider vancomycin, with an AWP of $382. The beneficiary would pay 
20 percent of the Medicare reimbursement of $363, or $73. The provider 
would pay about $5, on average. That's a $73 payment by the beneficiary 
for a drug that costs the provider $5.
    A second and equally serious problem are reports that some 
manufacturers use inflated AWPs as a strategy to increase market share. 
If Medicare reimburses physicians and suppliers based on the inflated 
AWP, providers have a greater incentive to use products with a larger 
``spread'' between the actual price they pay and Medicare's 
reimbursement. Providers may base prescribing decisions on economic 
incentives rather than clinical appropriateness. This practice may harm 
patient care, and drive over-utilization of services.
    Of all countries, America has the greatest access to cancer care. 
In recent years there has been a revolution in cancer care, enabling 
physicians to deliver the latest in quality care in many small centers 
across America. Medicare does not reimburse oncologists for the 
practice expenses associated with providing treatment to cancer 
patients in outpatient settings. Consequently, they rely on the 
overpayments for the drugs to cover these costs. Before we eliminate 
these overpayments, we must assure appropriate reimbursement of 
practice expense. While all agree on this, I am determined it be done 
accurately and fairly and am disappointed with how little real 
attention seems to be focused on it in today's testimony and will 
pursue this matter in questioning.
    We are pleased to welcome Tom Scully from the Centers for Medicare 
and Medicaid Services who will give us his views on AWP reform.
    Our second panel will include:

     George Reeb, from the Office of the Inspector General in 
the Department of Health and Human Services will update us on his 
findings comparing AWP to actual acquisition costs;
     Michael O'Grady from Project Hope will discuss a 
competitive bidding approach to establishing Medicare reimbursements 
for outpatient drugs;
     Dr. Paul Bunn from the American Society of Clinical 
Oncology will tell us about the new information on practice expenses 
that the Society has collected and submitted for consideration; and
     Kim Glaun from the Medicare Rights Center will present 
concerns from beneficiaries perspective.

    I look forward to your testimony.

                               

    Mr. STARK. Thank you, Chairman Johnson, for holding this 
hearing today. I could not agree with you more. It is clear 
that the pharmaceutical industry, and its partners are bilking 
Medicare beneficiaries and the program, perhaps out of billions 
of dollars.
    I will not repeat many of your observations because they 
hold. This illegal behavior, I think, harms each and every one 
of us. Medicare pays more for the services it covers, and the 
taxpayers pay more, in many cases, or beneficiaries pay more.
    The drug companies will argue in their defense that they 
are operating within the letter of the law. They will not 
change their behavior unless and until the law changes. Well, I 
disagree with their interpretation of the law. I certainly will 
agree with them that they are right. We should change the law, 
and that will take care of that.
    I have introduced a bill which would end the outrage. It is 
a market-based solution which would require Medicare to pay the 
true average market price for the drugs currently covered. That 
means we pay for what the doctors or the hospitals actually 
pay. It is consistent with the GAO recommendations. It is 
achievable in a short timeframe. It is enforceable, very stiff 
penalties, and it also recognizes that we must address the 
inadequacies of the current reimbursement to the doctors.
    One of the reasons this is so prevalent is that the doctors 
feel they are underpaid for the administration. They make it up 
through marking up the drugs. I do not think that is the way to 
do it. I think if they are underpaid, we should address that, 
as well. Then we will have a solution.
    I would like to put some human terms on this. There is an 
enterprising person in Florida. I know this sounds like a 
little advertising, but that is okay. He looked up on the web--
he was mad about this problem and found my bill. He wrote to 
one of our staff Members on the Committee on Ways and Means. He 
says, ``Terry, I would like to thank you for your time and 
effort in helping track down the price of cancer drug 
Leucovorin, $14.88. The fascinating 20 percent that I have to 
pay is $51.08. It does not take a rocket scientist to figure 
out that the numbers are questionable, not only the price of 
Leucovorin, but every item on the page would raise eyebrows.''
    ``My problem is, of course, that our HMO, health 
maintenance organization, dropped out of our county and now we 
only have Medicare. The facts will show that what I have to pay 
for my wife's chemo are out of line. Paying a 20-percent copay 
is okay as long as the doctor's numbers were fair. The page I 
will fax to you will show that there is a problem. Please thank 
Congressman Stark for his effort in trying to right the wrong. 
Please give my regards to Congresswoman Karen Thurman, as she 
helped me with the U.S. Department of Veterans Affairs (VA) 
health program, parentheses, this is only a personal opinion, 
but she is the jewel of Citrus County.''
    [Laughter.]
    Mr. STARK. ``Thank Terry and you. If you would send me your 
fax number, I will send you the document I have from the 
doctor.''
    I would like to ask that the Harper's personal address be 
redacted but that the letter be made part of the record, Madam 
Chair, and I submit it.
    Chairman JOHNSON. So ordered.
    [The letter from Mr. and Mrs. Harper follows:]

Terri Shaw
Washington, DC

    Terry,

    I would like to thank you for your time & effort that you gave in 
helping track down the price of the cancer drug (leucovorin). ($14.88), 
& the fascinating 20% that I have to pay, is $51.08. It does not take a 
rocket scientist to figure out that the numbers are questionable????.
    Not only the price of leucovorin, but every item on the page would 
raise eyebrows. I will fax the document from the doctor as I am having 
trouble with my scanner. My problem is of course is that our HMO 
dropped out of our county & now we only have Medicare.
    The fax will show that what I have to pay for my wife's chemo are 
out of line. Paying a 20% co-pay is o-k as long as the doctor's numbers 
were fair!!!!!!!. The page that I will fax to you will certainly show 
that there is a problem.
    Please thank Congressman Stark for his effort in trying to right a 
large wrong in our Medicare Program.
    Please give my regards to Congresswoman Karen Thurman, as she 
helped me with the VA health program. (This is only a personal opinion 
but, she is the jewel of Citrus County).
    Thank you Terry & if you would send me your fax number I will send 
the document I have from the doctor. Once again, we thank you.

                                              Bob & Florence Harper

                               

    Mr. STARK. I look forward to hearing what our witnesses 
have to say.
    [The opening statement of Mr. Ramstad follows:]
Opening Statement of the Hon. Jim Ramstad, a Representative in Congress 
                      from the State of Minnesota
    Thank you, Madam Chairwoman, for holding this important hearing 
today.
    The Medicare program is broken. Physicians are declining to see 
Medicare patients because of low reimbursement rates, reimbursement for 
new technologies used in outpatient settings is scheduled to be 
severely cut, and seniors in Minnesota pay higher premiums and receive 
fewer benefits than seniors in many other states under the 
Medicare+Choice program.
    The biggest factor driving all of these issues is the arbitrary 
formulas used in the Medicare program to determine reimbursement rates. 
Medicare reimbursement must be reformed to reflect real world market 
transactions.
    At the same time, we must make sure that new approaches to 
reimburse based on actual costs are accurate and truly encompass all 
costs associated with the medical procedure. Reimbursement for medical 
devices used in outpatient care is a perfect example of the inability 
of our system to accurately capture and report actual costs associated 
with medical services.
    For example, the proposed 2003 rule for the outpatient prospective 
payment system is based on nearly 60 million hospital claims. One would 
assume these claims provide an accurate view of the costs associated 
with performing a medical procedure. Unfortunately, further review of 
the hospital claims shows significant flaws in the hospital coding 
process. For example, these claims, which served as the basis for 2003 
payment rates, included submissions showing cardioverter-defibrillators 
used in colonoscopies and carpal tunnel surgeries and pacemakers used 
in cataract surgeries. In fact, of the 3,322 single-procedure claims 
for pacemaker insertions reviewed, 50 percent of those claims were 
coded incorrectly.
    Madam Chairwoman, Medicare's reimbursement policies must be 
reformed to reflect costs, and these costs must be accurate. Medicare's 
ability to accurately reimburse for Medicare services may be the 
biggest determinant of what medical services are available to our 
seniors. These aren't just reimbursement formulas or proposed rules--
these may be life or death decisions for millions of elderly Americans.
    Thank you, Madam Chairwoman, for holding this hearing, and I look 
forward to working with you to ensuring that seniors have access to the 
health care they need and deserve.

                               

    Chairman JOHNSON. Mr. Scully?

STATEMENT OF THE HON. THOMAS A. SCULLY, ADMINISTRATOR, CENTERS 
                FOR MEDICARE & MEDICAID SERVICES

    Mr. SCULLY. Madam Chairwoman, Congressman Stark, and 
Members of the Subcommittee, thank you for having me here 
today. I am always happy to be here on an issue I think we have 
so much agreement on.
    Obviously, as I think we all know, we all wanted to be 
talking about larger Medicare prescription drug issues this 
year. We still hope to get a Medicare drug benefit out of 
Congress this year. That seems increasingly unlikely. From the 
Administration's point of view, we would like to congratulate 
you for getting a Medicare prescription drug bill out of the 
Committee and out of the House. We certainly are committed to 
getting that legislation passed as soon as we can.
    Back to AWP, this is a longstanding problem. Medicare pays 
about $5 billion a year for about 450 outpatient drugs. We pay 
far more than any of the purchasers of these drugs, and the 
agency has been determined for many years to try to find a way 
to fix it.
    This is the third time I have testified on AWP this year. 
Having testified on a lot of issues, I can tell you that rarely 
have I seen the kind of bipartisan support for fixing a problem 
that this issue has. Senator Baucus and Senator Grassley in the 
Senate Committee on Finance were both very supportive of fixing 
this problem. Chairman Tauzin and Congressman Dingell were 
literally jumping up and down in their hearing to fix this 
problem. The Administration is very anxious to work with all of 
Congress, including this Committee, to fix this problem.
    I think this is clearly one place where Congress has a very 
huge problem that needs to be fixed. There are a number of ways 
to fix AWP. We support a lot of what the Committee has been 
talking about in your proposal on competitive bidding. We think 
that is one approach that could easily work. Mr. Stark's 
approach is another. The House Committee on Commerce, as you 
probably know, proposed using the average sales price (ASP), 
which is similar to Mr. Stark's bill. I think we have been 
saying all year long, we may have opinions. We would work with 
any one of them. The one thing that is clear is we are 
overpaying for all these drugs.
    Just to give you one example on the competitive bidding 
front, which we think in the long range--in the short range, an 
ASP approach or picking a new and better AWP may be the short-
term fix. We believe, however, that even those numbers 
potentially could be gamed in the long run, as AWP has been. In 
the longer term, we think a more market-oriented approach may 
work.
    Just to point out one example, in San Antonio last year in 
our DME competitive bidding proposal, we put out a bid for 
Albuterol, a widely used drug for asthmatics, and we received 
30 bids. Eleven companies out of the 30 were accepted. We saw a 
25-percent reduction in the price that we paid. It worked out 
to about average wholesale price minus 30, not average 
wholesale price minus 5. Not every drug is that easy to compete 
with. San Antonio is a big town. We understand competitive 
bidding may have other issues in smaller markets. It is very 
clear that we are overpaying and not paying market prices for 
drugs.
    We are also very concerned, as you are. We have said to the 
oncologists and others, that there are a number of areas--
particularly, oncology, hematology, and dialysis facilities--
where providers rely on the cross-subsidy from high average 
wholesale prices for drugs to make up for what they perceive, 
in some cases probably correctly, to be an underpayment for 
their basic services. We think on any proposal to fix AWP needs 
to address that.
    The GAO report, that came out earlier said that they 
believe that the oncology practice expense payments were 
underpaid by about $49 million. An earlier CMS report suggested 
that number was $52 million. We have been spending a lot of 
time with the oncologists, and it is part of our ongoing 
rulemaking. I cannot get into the details they submitted, but 
it is significantly higher, which probably is not surprising 
given the number. We do think that we need to find the right 
amount for practice expenses. As we reduce the overpayments for 
AWP, that we need to make adjustments probably, at the very 
least, for oncologists, hematologists, and for dialysis 
facilities.
    There are problems here. This fits into a broader payment 
concern. We believe the easiest way to fix this is for Congress 
to fix it, because if you fix it and we get the savings through 
average wholesale price, you can redistribute the appropriate 
money back into the base to pay oncology fees. It is very 
unclear at this point whether the agency has the ability to do 
that administratively.
    Our concern is we could save, we could discuss any number, 
say $100 million a year to $1 billion a year on overpayment for 
AWP. We have looked at legally whether we could actually save 
the money administratively and put it back in the payment 
rates. It is not clear. It is not clear that we cannot, but it 
is also not clear that we can. It would clearly be much cleaner 
to take the savings and for Congress to put the money back in 
the program.
    If we cannot put it back in administratively, you can see 
the potential problem we have. If we were to add, let us say 
hypothetically, $100 million a year back for the oncologists, 
we are in a context, at least right now, which we also hope to 
fix, where we are looking at a physician update of negative 4.4 
percent on the base conversion factor next year--an outcome I 
think all of us are hoping to avoid in the next few weeks for 
which the Administration strongly supports technical fixes.
    In the context of fixing payments to oncologists, if in the 
current setting we had to put $100 million back into the base 
for oncology fees as we fix the AWP, that update would not be 
negative 4.4 percent, it would be negative 4.6 percent. So, the 
idea in a budget neutral sense of fixing the oncology practice 
expenses as you save money in AWP is probably not particularly 
appetizing for anyone, including the oncologists. So it may be 
an option, but it is not clear that we can do that legally. 
That is one of the major reasons all year long we supported the 
idea of Congress making this fix and telling us, at least 
directing us, even if it is in somewhat vague terms, to make 
the market-base fix and to put some of the money back into the 
appropriate practice areas.
    There are a number of impacts of AWP that I do not think a 
lot of people understand. We clearly way overpay for drugs, but 
I want to go through one example because I think while we 
overpay for drugs. It is obviously a huge problem for taxpayers 
if we are overpaying $1 billion a year on drugs, which some 
folks claimed, but it also has an impact all through the rest 
of the health care system. So, I brought some charts today to 
illustrate that.
    About 80 percent of these drugs are paid for in physicians' 
offices, but about 20 percent are paid for in hospital 
outpatient settings. As you know, right now we are going 
through a rewrite of our hospital outpatient rule, which is 
incredibly complicated. I am spending a great amount of time 
on. Last year, we paid most of what are called pass-through 
drugs at 95 percent of AWP, and when we pay that, we 
significantly overpaid for a lot of drugs.
    This year, in our draft rule, we used about 60 million 
claims to figure out the real rate that hospitals paid for 
drugs. Those rates came down significantly, and they will come 
down. In the final rule, they came down a lot, and I used the 
draft rule data. In the final rule, we are actually using even 
better data and better claims. I think some of the drug prices 
will go down and others will go up, so there will be some 
significant changes.
    Last year, the reason I put this chart up is this does not 
just cost the taxpayers $1 billion. If you look at what we paid 
on that chart--and you probably cannot read it too well from 
that distance and I apologize--what you will see is that for 
some drugs, we will overpay a lot. I will just give you an 
example: Retuxin last year. When we paid at 95 percent of AWP, 
we paid $372. This year, when we are using actual hospital 
claims to pay it, the price is dropping by 20 percent.
    Each of the first four drugs on the chart are cancer drugs. 
As you go down the line, you will find that when you switch 
from 95 percent of AWP, which we paid in the outpatient 
setting, to real prices that hospitals pay, you frequently end 
up with 75 or 80 percent of the AWP. So obviously for 
taxpayers, paying that lower rate is the right thing to do.
    What a lot of people do not realize is the hospital 
outpatient pot is a finite, roughly $17-billion pot. If you 
switch to the next chart, I think what you will find is that in 
addition to paying too much, when we have to put more money 
into overpaying for drugs, and it is somewhat similar but 
different for devices, you also have to take money out of basic 
services. So last year, for instance, the payment in an 
outpatient setting for colorectal colonoscopies dropped 16.3 
percent. For mammographies, it went down 13.2 percent. For 
emergency room (ER) level visits, the mid-level ER visits, it 
went down 3.7 percent. When you take out overpayments for drugs 
you free up money to go back into the base services because it 
is a finite pot. If we are paying too much for drugs, we are 
not necessarily just paying too much from taxpayers. We are 
also taking resources out of other areas for critical services, 
like colonoscopies, mammographies, and ER visits.
    So this year, we found that we took a lot of money out of 
the payments, and we had overpaid for AWP. We now have 60 
million claims, in the final outpatient rule. We are going to 
take down a lot of payments for a lot of drugs to what we think 
are far more market oriented, far more appropriate levels. What 
you find is, and these will change in the final rule, but you 
will find double-digit increases over last year for payments of 
colonoscopy, double-digit increases for mammographies, and 
probably close to double-digit increases for the basic 
emergency room visit. There is also a direct tradeoff between 
overpaying for drugs and underpaying for basic hospital 
services that a lot of people do not understand.
    So it is not just bad policy for taxpayers to overpay for 
outpatient drugs, and it does not just have the impact of 
spending too much taxpayer money. It also has the impact of 
negatively affecting hospitals on their basic services for 
critical preventive services and critical things like emergency 
room visits. I do not think the connection is often made in 
that regard.
    So we are determined for a variety of reasons, mainly so 
that we do not overpay for drugs, but also to make sure that we 
have the accurate payment for base physician and hospital 
services, to fix this policy. I think it is clear on a 
bipartisan basis that this is bad payment policy. We have an 
enormous level of bipartisan support to fix it. It is very 
clear.
    We would very, very much like to have Congress fix AWP this 
year if you can do it before you go. If you cannot, the 
Administration is committed to fixing it on our own. I will 
tell you that, just in brief, if Congress does not fix it this 
year, our plan is to pick one of our 23 contractors--right now, 
we have 23 contractors that pay--they, each one of them 
measures AWP on their own, and they decide what AWP is locally. 
When you do a poll of those contractors, which we have done, 
you will find that the payments vary massively and their 
interpretation of the AWP varies massively.
    So administratively, our plan immediately would be later 
this year to pick one contractor--we have a couple that we 
believe are better than others. We will pick our best of the 23 
carriers and tell them that they are going to be essentially 
the common price determiner for what is real AWP. We think that 
would immediately save $100 million a year.
    Then our plan would be to go out and do a much more 
detailed market survey. Most of our carriers are Blue Cross 
plans. They know what they are paying for people for the same 
drugs who are under 65. We believe that if we did nothing but 
identify appropriate market prices, we could probably save as 
much as $500 million a year.
    We think Congress can probably do more if you direct us to 
do any one of the hybrid approaches that you have, but our view 
is the number one thing that we should not do is let this go on 
any longer. It needs to be fixed as soon as it possibly can.
    We would be very anxious to work with the Committee and 
Congress to try to fix this in the next 2 weeks by any one of 
the approaches that have been suggested. If not, I think the 
Administration is committed to fixing it on our own 
administratively during the course of the next 6 months. Thank 
you, Madam Chair.
    [The prepared statement of Mr. Scully follows:]
  Statement of the Hon. Thomas A. Scully, Administrator, Centers for 
                      Medicare & Medicaid Services
    Chairman Johnson, Congressman Stark, distinguished Subcommittee 
Members, thank you for inviting me to discuss Medicare Part B 
reimbursement for prescription drugs. As you know, prescription drugs 
have become an increasingly important component of modern health care, 
particularly for Medicare beneficiaries. The President has taken a 
number of steps to provide immediate relief to America's seniors and 
people with disabilities who have high drug spending, and we are 
continuing to work closely with Congress to strengthen Medicare by 
including a comprehensive prescription drug benefit. I would like to 
thank you for your hard work on creating prescription drug legislation. 
Although we are disappointed that Medicare beneficiaries still do not 
have comprehensive drug coverage, we remain hopeful that we can 
continue to work together to enact this crucial benefit as soon as 
possible.
    It is also critically important that we improve the payment system 
for the small number of outpatient drugs currently covered by Medicare. 
It is clear that Medicare's payment system for those covered drugs, 
based on average wholesale price, or ``AWP,'' is seriously flawed. The 
Medicare program relies on the prices reported by drug manufacturers to 
set payment rates. We all agree that Medicare should pay appropriately 
for all the services and treatments covered by Medicare, including the 
limited drugs that we currently cover. At the same time, we need to be 
certain that Medicare pays physicians and other providers appropriately 
for their services when they furnish drugs to beneficiaries. We support 
fair, competitive payments for Medicare prescription drugs. We 
understand that the Committee is working on such a proposal and we look 
forward to working with you.
    By law, Medicare does not pay for most outpatient prescription 
drugs. However, there are some specific exceptions where Medicare 
covers pharmaceuticals, such as those drugs that are not self-
administered and are furnished incident to a physician's covered 
services. In these cases, the law requires that Medicare pay physicians 
and other providers based on the lower of the billed charge or 95 
percent of the drugs' AWP. Numerous studies have indicated that the 
industry's reported wholesale prices, the data on which Medicare bases 
its drug payments, are vastly higher than the prices drug manufacturers 
and wholesalers actually charge physicians and 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 for these drugs. Some affected 
physicians and providers have suggested that these Medicare ``drug 
profits'' are necessary 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. We 
believe that finding a way to pay appropriately for both the drugs and 
the services related to furnishing those drugs is a better approach.
    Clearly, Medicare drug pricing is complex. Over the years, numerous 
legislative efforts have made progress toward developing an effective 
alternative to AWP. These efforts have aimed at ensuring that Medicare 
and its beneficiaries do not pay more than they should for the 
prescription drugs that Medicare covers, and that physicians and 
providers are compensated appropriately for their services. We continue 
to believe that a legislative remedy to this problem would be 
preferable, and we will work with Congress to implement effective 
legislation. However, if necessary, we are prepared to build on the 
strong evidence and best ideas for reform developed in Congress by 
taking action under the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA), which provided some 
authority for the Secretary to act after reviewing the General 
Accounting Office (GAO) report to Congress. Under BIPA, we could move 
to a market-based system for drugs and adjust payments for services 
related to furnishing drugs such as practice expenses for oncology 
administration. As we look to the future, particularly as we add 
broader prescription drug coverage to Medicare, it is vital that we 
develop market-based, competitive pricing systems for drugs so that we 
do not repeat the past mistakes of overpayment. We are committed to 
working with Congress to amend the current system to make sure that 
Medicare pays a fair, competitive price for all benefits, including the 
limited drugs the program now covers.
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 
Congress were creating the Medicare program today, we believe it would 
certainly include a prescription drug benefit. When the Medicare 
program was enacted in 1965, however, prescription drugs played a less 
prominent role in health care than they do today. Although by law 
Medicare does not generally cover over-the-counter or outpatient 
prescription drugs, 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 in conjunction with certain 
        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 subsequent to 
        organ transplants;
         Clotting factors for beneficiaries with hemophilia;
         Erythropoietin, the drug that constitutes Medicare's 
        largest drug expenditure, 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 hospital outpatient settings, 
dialysis centers, or doctors' offices, and are purchased directly by 
the physician or physicians and providers. Generally, Medicare does not 
cover preventive drugs such as vaccines. However, Medicare law provides 
coverage specifically for certain vaccines, namely influenza, 
pneumonia, and hepatitis.
    By law, Medicare carriers generally pay for these drugs based on 
either 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 by the Medicare Trust 
Funds. In general, Medicare beneficiaries must also share in the cost 
of purchasing these drugs, except for the flu and pneumonia vaccines, 
through their Part B premiums, 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 that are 
reported by drug manufacturers and printed in compendia such as the Red 
Book, published by Medical Economics Company, Inc. However, 
manufacturers and wholesalers are routinely offering physicians and 
providers competitive discounts that reduce the actual amount the 
physician or physicians and providers pays for the drugs. These 
discounts are not reflected in the published price and reduce the 
amount many physicians and providers actually pay to levels far below 
those prices published in the Red Book. However, Medicare's regulated 
payment system is tied to the published price of the drugs, precluding 
the program from obtaining competitive discounts for the drugs it 
covers. In addition, use of the AWP, as reported by manufacturers to 
companies that compile such prices, creates a situation where a 
manufacturer can, for certain drugs, arbitrarily increase the reported 
AWP and, in turn, offer physicians a deeper ``discount.'' Furthermore, 
the deep competitive discounts, compared to the reported AWP, offered 
by drug manufacturers could give physicians and physicians and 
providers incentive to use a particular manufacturer's products for 
Medicare beneficiaries.
    To give an example, a recent General Accounting Office report found 
that Medicare payments in 2001 for Part B-covered outpatient drugs were 
often much higher than the prices paid by physicians and pharmacy 
providers. The GAO reported that discounts of 13 to 34 percent off AWP 
were widely available for many physician-administered drugs. GAO also 
noted that two other physician-administered drugs had discounts of 65-
86 percent.
    This Committee, CMS, the Department's Office of the Inspector 
General (IG), and others have long recognized the shortcomings of using 
AWP as the basis for Medicare drug reimbursement. The IG has published 
numerous reports showing that true competitive 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 
other similar 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 (less 5 percent). It is simply unacceptable 
for Medicare to continue paying for drugs in an outdated, 
noncompetitive 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 by 
physicians and providers. However, these efforts have been 
unsuccessful. For example, the Agency's proposed June 1991 physician 
fee schedule included payments based on 85 percent of AWP. The Agency 
also proposed that certain high volume drugs be reimbursed at levels 
equal to either the lesser of 85 percent of AWP or the physicians' and 
providers' estimated acquisition cost. The Agency received many 
comments, primarily from oncologists, indicating that an 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. Other comments 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, the Agency established a policy for Medicare to 
pay either 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 for many drugs were still significantly 
greater than the competitive discounts obtained by physicians. 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 Department of Justice (DOJ) and the National 
Association of Medicaid Fraud Control Units made advertised market 
wholesale prices for 49 drugs covered by Medicaid available to State 
Medicaid programs and to First Data Bank, a drug price compendium owned 
by the Hearst Corporation. These wholesale prices, culled from 
wholesale catalogs circulated among the physician and provider 
community, while not reflecting certain other discounts such as 
rebates, were closer to the actual average wholesale prices for these 
drugs than the drug manufacturers' reported AWP. In 2000, the Agency 
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. Due to concerns about Medicare reimbursement for 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. Anticipating Congressional action that was soon 
enacted in BIPA, establishing a moratorium on decreases in Medicare 
drug reimbursement rates, the Agency in December 2000 postponed 
Medicare carriers' use of the DOJ data while the GAO conducted a study 
of Medicare drug pricing and related payment issues. BIPA also provided 
some authority for the Secretary to address AWP after reviewing the 
GAO's findings.
FLAWS IN AWP THAT AFFECT THE OUTPATIENT RULE
    The shortcomings that I've discussed today regarding AWP also 
affect payment in the outpatient prospective payment system (OPPS). 
More specifically, it has affected perceptions about the updated 
payments for OPPS for 2003. In 2000, CMS adopted a prospective payment 
system for outpatient services delivered by hospitals, which includes 
the drugs and devices used in a procedure. By law, payments must be 
based on the relative cost of treatment. The law further requires that 
CMS must make additional payments, called ``pass-through payments,'' 
for new drugs and devices. These payments are allowed for two to three 
years and, for drugs, are calculated to be the difference between the 
amount in the rate for existing products and the average wholesale 
price for the new product. The total dollars set aside for these new 
drugs and devices currently is limited to 2.5 percent of total spending 
for services under the outpatient prospective payment system. By law, 
CMS must use AWPs as reported by the manufacturer for these drugs to 
set payment rates for these drugs and to calculate the amount funded 
out of the pass-through pool. Using AWPs that overstate the costs of 
some drugs results in higher ``pass-through payments'' and makes less 
money available for other items eligible for pass-through payments.
    In 2003, as a result of collection and analysis of nearly 60 
million actual hospital claims, we have been able to set payment rates 
more accurately. As the payments for some procedures go up, payments 
for other ones go down and vice versa. However, a recent New York Times 
article misrepresented the impact on payments to hospital outpatient 
departments. Although payments for many items will be lower in 2003, 
overall Medicare payments to outpatient departments are projected to 
increase by almost 8 percent, reflecting hospitals' estimated 
acquisition costs rather than manufacturers' reported wholesale prices 
for prescription drugs. While proposed rates for many drugs are lower 
than 2002 rates, 2002 rates were likely greatly overstated in many 
cases because they were based on overinflated manufacturers' AWPs.
    The story is similar with respect to our payments for procedures 
using pass-through devices. For 2002 rates we used prices reported by 
manufacturers to set payment rates for these types of procedures. The 
other hospital costs for the procedure, such as the operating room, 
supplies, and nursing time, were calculated using the latest available 
charges from approximately 50 million hospital claims and the latest 
available cost reports. I'd like to discuss a couple of examples of how 
payment rates have changed over the past several years for procedures 
that use pass-through devices. In my first example, payment for the 
insertion of a cardioverter-defibrillator, a hospital in 2001 received 
$7,411 for the procedure plus an additional amount for pass-through 
devices used during the procedure. The additional payment amount for 
pass-through devices was equal to the hospital's charges for the 
device(s) reduced to costs using the latest available hospital's cost-
to-charge ratio (CCR). For 2002, the estimated cost of the procedure 
was about $1,500. Using claims and cost report information from 
hospitals, we would have added another $6,800 for device costs and the 
total payment would have been about $8,300. However, because we folded 
in an additional amount based on prices submitted to us by 
manufacturers, we added another $11,100 to the payment--bringing the 
total device-related costs to $17,900. Thus, in 2002, a hospital 
receives about $19,400 plus an additional amount in pass-through 
payments. For 2003, we have determined that the total payment for the 
procedure should be about $9,400. This payment reflects the cost of the 
procedure ($1,550) plus the estimated cost of devices used with the 
procedure ($7,850). Because pass-through eligibility for the devices 
that are being used with this procedure will expire January 1, 2003, we 
have fully incorporated their estimated costs, using hospital claims 
and the latest available cost reports, into the costs of the procedure. 
Similarly in my second example, the implantation of a drug infusion 
device, a hospital in 2001 received $561 plus an additional amount for 
pass-through devices used during the procedure. The additional payment 
amount for pass-through devices was equal to the hospital's charges for 
the device(s) reduced to costs using the latest available hospital's 
cost-to-charge ratios (CCR).
    For 2002, the estimated cost of the procedure was about $940. Using 
claims information from hospitals we would have added another $3,800 
for device costs and the total payment would have been about $4,750. 
However, because of the fold-in based manufacturers' reported prices, 
we added another $2,400 to the payment--bringing the total device-
related costs to $6,200. Thus in 2002 a hospital receives about $7,150 
plus an additional amount in pass-through payments.
    As noted in the proposed rule, we estimate that the total payment 
for the procedure for 2003 should be about $6,660. This payment 
reflects the estimated cost of the procedure ($1,640) plus the 
estimated cost of devices used with the procedure ($5,020). Because 
pass-through eligibility for the devices that are being used with this 
procedure will expire January 1, 2003, we have fully incorporated their 
estimated costs into the procedure.
    To the extent that CMS has to overpay for devices, payments for and 
access to other services for all beneficiaries are reduced. For 
example, between 2001 and 2002, payment for diagnostic mammography fell 
13 percent. Under the proposed 2003 rates, the rationalization of 
payment for many devices has helped to allow for an 18% increase in 
diagnostic mammography payments. In the end, from 2000 to 2003, payment 
rates for most procedures using pass-through devices will have 
increased steadily and significantly. We shouldn't be allowing 
artificial prices nor artificial AWPs to undercut access to basic, 
preventive, and other services for beneficiaries.
CONCLUSION
    Medicare beneficiaries rely on prescription drugs to treat a wide 
variety of chronic and acute conditions. For many seniors, in the 
traditional fee-for-service plan, the coinsurance that they pay is tied 
to Medicare's payment rate. We must find a fair way to make sure that 
Medicare beneficiaries and taxpayers do not pay excessive prices for 
prescription drugs that are far above the competitive discounts that 
are widely available today to other Americans. We need to pay 
appropriately for all Medicare benefits, including the prescription 
drugs we do cover and the services required to furnish those drugs. We 
look forward to working with you Mrs. Chairman, this Committee, and the 
Congress to implement improvements in Medicare's payment policy for 
currently covered drugs. Thank you for the opportunity to discuss this 
important topic with you today, and I am happy to answer your 
questions.

                               __________

--------------------------------------------------------------------------------------------------------------------------------------------------------
 --------------------------------------------------------------------------------------------------------------------------------------------------------
APCs for Basic and Preventive Services
 --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Difference in                  Difference in
                                                                                       2001       2002     2001 vs. 2002     Proposed     2002 vs. 2003
APC                                                                  Description       Rate       Rate         NPRM Rate    2003 Rate         NPRM Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
0158                                                                            Colo$400.93    $335.46            -16.3%      $393.19            +17.2%
                                                                                Colonoscopy
--------------------------------------------------------------------------------------------------------------------------------------------------------
0271                                                                 Mammography     $35.17     $30.54            -13.2%       $35.89            +17.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
0601                                                                   Mid-level     $50.24     $48.36             -3.7%       $54.09            +11.9%
                                                                    clinic visit
--------------------------------------------------------------------------------------------------------------------------------------------------------
0611                                                                   Mid-level    $106.01    $109.95              3.7%      $138.34            +25.8%
                                                                        ER visit
--------------------------------------------------------------------------------------------------------------------------------------------------------


                               __________

 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Drug APCs for Select Cancer and Other Drugs with Pass-Through Status Set to Expire January 1, 2003
 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                      Percent Difference               Percent Change in
                                                                                                               2002 Payment                                 Between 2002       2003 Proposed to
                                                                                 2001       2001 Median        Rate (Net of                              Payment (net of      2002 Payment Rate
                                                                   Brand        Total         Hospital Cost        Pro-rata         2003 Proposed      pro-rata and 2001       (Net of Pro-rata
APC                                              Descriptor         Name        Units          Per Unit          Reduction)      Payment Per Unit           median cost)             Reduction)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0849                                       Rituximab cancer      Rituxan       207,331          $310.85              372.38               $296.97                   +20%                 -20.3%
                                                  treatment
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
7046                                        Doxorubicin hcl        Doxil        36,834          $247.41              294.08               $236.12                   +19%                 -19.7%
                                               liposome inj
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0844                                            Pentostatin       Nipent            25        $1,161.78             1355.13             $1,108.83                   +17%                 -17.0%
                                                  injection                         8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0858                                     Inj cladribine per    Leustatin        10,482           $46.18               34.79                $43.69                   -25%                  25.6%
                                                       1 MG
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
7042                                                       CapecitXeloda or    204,556            $1.93                2.00                 $1.56                    +3%                 -22.0%
                                                     150 mg
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0733                                       Non esrd Epoetin      Procrit   12,272,503            $10.32               $9.46                 $9.88                    -8%                  +4.5%
                                                  alpha Inj
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0734                                     Darbepoetin alfa, 1     Aranesp                                                                    $4.74
                                                        mcg
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                               

    Chairman JOHNSON. Thank you for your testimony, Mr. Scully.
    Unfortunately, last night, I only had your Senate Committee 
on Finance statement of March. While I reviewed that, that was 
the most we had and my morning did not allow me to look at the 
statement that we just received. I am delighted to hear of the 
more detailed information that you have. It is absolutely true 
that you need to be able to respond to drops in drug prices as 
volume rises, as well as other changes in the market. So, I 
hope that we will be able to work together to get this job 
done.
    The new Gallup survey results developed by the American 
Society of Clinical Oncology (ASCO), as they will testify 
later, do give us some very concrete information. Will you be 
willing to work with them on that data and its implications for 
reimbursement of practice expenses? The Gallup survey does use 
the same methodology that the American Medical Association and 
CMS uses for other payment costs.
    Mr. SCULLY. Absolutely. I believe we have been working with 
them a lot on their data, and we will probably end up 
incorporating it in whatever policy we use, to the extent we 
can.
    Chairman JOHNSON. The biggest and most dramatic difference 
is the issue of payment for non-physician work, that so many 
other types of personnel are necessary to deliver this care, 
that it does not come out in the way we generally calculate 
payments. So, we do have to look differently at practice 
expenses in the delivery of cancer care than we do in some 
other areas. Would you agree on that?
    Mr. SCULLY. Absolutely, and I think we have acknowledged 
that we need to make some changes in the practice expense 
payment for oncologists. As you probably remember, we went 
through one of your oncology clinics in your district earlier 
this year. I think it is clear that in a number of these 
settings, the base practice payments are underpaid, but they 
also are relying on a transfer subsidy, basically, of excessive 
margins on AWP. We believe we should pay people correctly in 
both situations.
    Chairman JOHNSON. Thank you. In preparing for this hearing, 
I looked at the list of the 32 drugs that are 82 percent of the 
cost for the government. While Albuterol was on that list, none 
of the other couple of pages of examples of gross spreads were 
on that list. I want to know whether or not your agency is 
going to be able to, of the 450 drugs, give us a better 
understanding of which of those drugs are oral, which are 
injectable, and which we have a practice expense component, 
because you cannot treat them sort of all the same.
    If some are just an injection in an office that is in 
addition to a whole other office procedure or visit for which a 
physician is reimbursed, that is different than if it is part 
of a day-long process of treatment. So, it is interesting to me 
that some of the largest abuses, some of the biggest spreads 
are in oral and injectable drugs, with which there is not, to 
my knowledge, a significant practice expense issue.
    So, it would be very helpful if you could provide for the 
Committee a list of those that you think there is a practice 
expense issue associated with. Then, the other critical piece 
of information to doing this right, is which of those drugs are 
sole-source, which are dual-source, and which are multi-
sourced. You can compete where there is multi-source. You 
cannot compete where there is sole source, and in some of the 
cancer areas, that is a very big issue. So, do you think you 
will be able to provide us with that kind of information in the 
near term as we move forward trying to resolve this?
    Mr. SCULLY. Absolutely. We would be happy to.
    [The information follows:]

                           Centers for Medicare & Medicaid Services
                                               Washington, DC 20201
                                                             1/6/03

Hon. Nancy L. Johnson
Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
2113 Rayburn House Office Building
Washington, DC 20515

    Dear Chairman Johnson:

    The attached table shows information for the top 35 drugs that 
account for 86.5 percent of Medicare spending for currently covered 
drugs paid for by part B carriers. Drugs paid by intermediaries (e.g., 
to ESRD facilities for epoetin, vitamin D and iron preparations, and to 
hospital outpatient departments for separate drug APCs or for pass-
through drugs) are not shown on this table. The table shows both the 
technical and common names for the drug as well as the clinical 
indications for which the drug is used.
    Medicare Spending: In 2001, allowed charges were $6.4 billion for 
all carrier paid drugs. The 35 drugs shown on the table account for 
$5.6 billion. Seven drugs account for 50.5 percent of spending for 
carrier-paid drugs ($3.2 billion). The top drug, Procrit, accounts for 
12.1 percent of spending. Two interchangeable prostate cancer drugs, 
Lupron and Zoladex, combined account for 17.2 percent of carrier paid 
drugs. Two drugs furnished via a covered item of durable medical 
equipment, Albuterol and Ipratropium Bromide, account for 12.8 percent 
of carrier drug spending.
    Competition: The table also shows the type of competition for the 
drug, i.e., whether the drug is sole source, multi-source or generic. 
This information is primarily from the hospital outpatient department 
prospective payment system classification for the 30 of these drugs 
covered under that system and from the FDA Orange Book for four drugs. 
Other than unclassified injections:

         Twenty of the 35 drugs, representing 44.0 percent of 
        Medicare carrier drug spending are sole-source.
         Nine of the 35 drugs, representing 25.2 percent of 
        Medicare carrier drug spending are multi-source.
         Five of the 35 drugs, representing 16.4 percent of 
        Medicare carrier drug spending are generic.

    Form of Administration: The table also shows the form of 
administration for the drug. Other than unclassified injections, which 
account for 1.0 percent of drug spending and have multiple forms of 
administration:

         Twenty-two of the 35 drugs, accounting for 38.0 
        percent of carrier spending, are administered by intravenous 
        infusion.
         Two of the 35 drugs, accounting for 12.8 percent of 
        carrier spending, are administered through an inhaled solution, 
        i.e., through an item of Medicare-covered durable medical 
        equipment. Specifically, albuterol and ipratropium bromide are 
        inhaled as an aerosolized solution through a nebulizer.
         Two of the 35 drugs are oral immunosuppressive drugs 
        taken to prevent rejection of an organ transplant. They account 
        for 1.5 percent of carrier spending.
         Eight of the 35 drugs, accounting for 33.3 percent of 
        carrier spending, are administered through injections. Of 
        these, two are subcutaneous injections, two are injected into a 
        joint, three are administered through intramuscular injections 
        and one can be administered by subcutaneous or intramuscular 
        injection. Medicare pays a separate fee for administration of 
        these injections.

    Payment for Drug Administration/Dispensing: Medicare pays a 
separate fee for injections. Each of the subcutaneous and intramuscular 
injections and injections into a joint would receive such separate 
payment.
    Medicare pays a separate fee for administration of chemotherapy 
drugs (and other drugs administered through intravenous infusion such 
as Remicade for rheumatoid arthritis).
    Oncologists and rheumatologists have raised issues regarding the 
adequacy of payment for the administration of drugs. These concerns 
generally involve the administration of intravenous infusion drugs and 
other drugs that are not taken orally. Oncologists argue that Medicare 
payment for chemotherapy administration is too low and drug 
overpayments are necessary to subsidize a practice expense 
underpayment. Rheumatologists make a similar argument with respect to 
infusing Remicade.
    Medicare does not make a separate payment for administration of 
clotting factor to treat hemophilia. A draft GAO report recommends that 
Medicare lower payment for clotting factor and establish a separate 
payment for clotting factor administration.
    It has been suggested that ESRD facilities use their Medicare drug 
mark-ups to compensate for what they believe to be inadequate composite 
rates. It has also been suggested that there may be issues about 
administration or dispensing of infusion drugs (other than chemotherapy 
drugs) furnished via an item of Medicare-covered durable medical 
equipment. Suppliers of durable medical equipment have argued that 
there is an administration or dispensing issue regarding inhalation 
drugs furnished through durable medical equipment, such as nebulizers.
    CMS clinical staff have reviewed the remaining carrier paid drugs 
that Medicare currently covers. For drugs not on the list of top 35 
drugs, the same types of issues would arise for chemotherapy, clotting 
factor, ESRD facility separately billable drugs and infusion and 
inhalation drugs furnished via durable medical equipment. Our clinical 
staff review does not suggest different types of administration issues 
for the remaining drugs.
    There are two types of issues regarding using some of the savings 
from a revised method of paying for drugs currently covered in Medicare 
to pay for administration or dispensing of these drugs. First, for 
drugs where the administration is paid under the physician fee 
schedule, increases in administration payments would need to be done in 
a manner that is not budget-neutral under the physician fee schedule. 
Second, for drugs where the administration is not paid under the 
physician fee schedule, there an administration or dispensing fee would 
need to be established. We would be glad to work with the Committee 
staff to provide technical assistance to address both of these issues.

            Sincerely,
                                              Hon. Thomas A. Scully
                                                      Administrator
                               __________

                                                                        ALLOWED CHANGES FOR TOP 25 DRUGS PAID BY CARRIERS
                                                                                  CY 2001 Through November 2002
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                 Cumulative
                                                                                                               Type of          Allowed     Percent of total  percent of total       Form of
                HCPCS Code                         Description               Clinical Indication(s)         Competition**   Charges*** (in    Medicare drug     Medicare drug    Administration
                                                                                                                               millions)        spending          spending
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Q0136                                         Non-ESRD epoetin alfa       Treatment of Anemia: in cancer     Multi-source          $779.9             12.1%             12.1%     Subcutaneous,
                                                      inj (Procrit)    patients on chemotherapy, related                                                                            Intravenous
                                                                      to AZT treatment of HIV-AIDS, from                                                                                  bolus
                                                                       chronic kidney failure; reduction
                                                                          of allogenic blood transfusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9217                                                              LeuAdvanced prostatic cancer; central      Sole-source          $665.5             10.4%             22.5%     Intramuscular
                                                                  (Lupprecocious puberty; endometriosis;
                                                                          Uterine leiomyomata (fibroids)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7644,                                                  Ipratropium     Bronchospasm (Asthma and chronic          Generic          $469.5              7.3%             29.8%           Inhaled
                                                                                                                                                                                      solution]
J7645                                            Bromide (Atrovent)            obstructive lung disease)
                                                                         Rhinorrhea: perennial rhinitis,
                                                                                             common cold
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9202                                             Goserelin acetate   Advanced prostatic cancer; central      Sole-source          $437.2              6.8%             36.6%      Subcutaneous
                                                  implant (Zoladex)   precocious puberty; endometriosis;
                                                                          Uterine leiomyomata (fibroids)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7619,                                                    Albuterol     Asthma, chronic obstructive lung          Generic          $354.4              5.5%             42.1%   Inhaled solution
J7618,                                                                                           disease
J7620,
J7625
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9265                                          Paclitaxel injection   Cancer: ovarian, breast, lung; AIDS-   Multi-source          $269.2              4.2%             46.3%       Intravenous
                                                            (Taxol)             related Kaposi's sarcoma                                                                               infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9310                                              Rituximab cancer               Non-Hodgkin's lymphoma      Sole-source          $269.2              4.2%             50.5%       Intravenous
                                                treatment (RituXan)                                                                                                                    infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2430                                          Pamidronate disodium    Reduce high calcium levels caused      Sole-source          $193.4              3.0%             53.5%       Intravenous
                                                           (Aredia)      by cancer; bone metastases from                                                                               infusion
                                                                           cancers and multiple myeloma;
                                                                                         Paget's disease
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1745                                          Infliximab injection        Rheumatoid arthritis; Crohn's      Sole-source          $196.1              3.1%             56.5%       Intravenous
                                                         (Remicade)                              disease                                                                               infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9170                                          Docetaxel (Taxotere)                 Cancer: breast, lung      Sole-source          $167.9              2.6%             59.1%       Intravenous
                                                                                                                                                                                       infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9045                                         Carboplatin injection                    Ovarian carcinoma      Sole-source          $165.2              2.6%             61.7%       Intravenous
                                                       (Paraplatin)                                                                                                                    infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1441                                                    Filgrastim   Myelosuppresive chemotherapy; Bone     Multi-source          $163.1              2.5%             64.2%       Intravenous
                                                                                                                                                                                      infusion,
(480                                                      injection   marrow transplant; Peripheral Blood                                                                          Subcutaneous
mcg)                                                     (Neupogen)   Progenitor Cell collection, severe
J1440                                                                                chronic neutropenia
(300
mcg)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9206                                          Irinotecan injection    Metastatic carcinoma of the colon      Sole-source          $161.4              2.5%             66.7%       Intravenous
                                                        (Camptosar)                            or rectum                                                                              bolus and
                                                                                                                                                                                       infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9201                                       Gemcitabine HCl (Gemzar)            Cancer: pancreatic, lung      Sole-source          $136.9              2.1%             68.8%       Intravenous
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1561,3                                          IV immune globulin      Immunodeficiency; low platelets          Generic          $118.0              1.8%             70.6%       Intravenous
                                            (IveeGam, Biogam BayGam,  (ITP); bone marrow transplants; HIV
                                                       Panglobulin)    infection; severe blistering skin                                                                               Infusion
                                                                                                diseases
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1260                                           Dolasetron mesylate       Antiemitic (for vomiting after     Multi-source          $112.6              1.8%             72.4%       Intravenous
                                                          (Anzemet)      chemotherapy); Prevent of treat                                                                               infusion
                                                                                   post-operative nausea
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7320                                        Hylan G-F 20 injection        Pain from knee osteoarthritis     Multi-source           $84.7              1.3%             73.7%     Injected into
                                                          (Synvisc)                                                                                                                       joint
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J3490                                            Drugs unclassified                             Multiple   Not applicable           $66.0              1.0%             74.7%          Multiple
                                                          injection
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J0640                                                              LeucovorinCancer (after methotrexate)          Generic           $63.0              1.0%             75.7%       Intravenous
                                            injection (Wellcovorin)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
90658                                                   Flu Vaccine                 Influenza prevention     Multi-source           $74.1              1.2%             76.9%     Intramuscular
(3 yrs)
90659
(whole)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2405                                               Ondansetron HCl       Antiemitic (for vomiting after     Multi-source           $60.3              1.0%             77.9%       Intravenous
                                                 injection (Zofran)                        chemotherapy)                                                                               infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9355                                       Trastuzumab (Herceptin)                        Breast cancer      Sole-source           $54.8              0.9%             78.8%       Intravenous
                                                                                                                                                                                       infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7517                                         Mycophenolate mofetil   Allogenic transplants prevent organ     Sole-source           $55.0              0.9%             79.7%              Oral
                                                      oral CellCept                            rejection
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7190                                        Factor viii (Monarc-M)                           Hemophilia          Generic           $50.7              0.8%             80.5%       Intravenous
                                                                                                                                                                                       infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2820                                        Sargramostim injection   Bone marrow transplant; recovery of     Sole-source           $41.7              0.7%             81.2%       Intravenous
                                                                  (Leukineneutrophils after chemotherapy                                                                               infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J0151                                           Adenosine injection    For use in cardiac stress testing      Sole-source           $40.3              0.6%             81.8%       Intravenous
                                                        (Adenoscan)         when patient cannot exercise                                                                               infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7192                                       Factor viii recombinant                           Hemophilia     Multi-source           $40.7              0.6%             82.4%       Intravenous
                                                                                                                                                                                       infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1526                                               Granisetron HCl      Antiemetic (nausea and vomiting      Sole-source           $34.7              0.5%             82.9%       Intravenous
                                                 injection (Kytril)                  after chemotherapy)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7507                                               Tacrolimus oral   Prevention of transplant rejection      Sole-source           $39.5              0.6%             83.5%              Oral
                                                          (Prograf)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9390                                          Vinorelbine tartrate                             Cancer: Lung, Sole-sourcerian       $34.2              0.5%             84.0%       Intravenous
                                                        (Navelbine)                                                                                                                   injection
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7315,                                                       Sodium        Knee pain from osteoarthritis      Sole-source           $34.4              0.5%             84.5%    Injection into
                                                                                                                                                                                          joint
J7316,                                                  hyaluronate
Q3030,                                                    (Hyalgan;
J7317                                                      supartz)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9350                                          Topotecan (Hycamtin)     Cancer: ovarian, small cell lung      Sole-source           $33.0              0.5%             85.0%       Intravenous
                                                                                                                                                                                       infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9000                                         Doxorubicin injection   Cancer: leukemia, kidney, sarcoma,     Multi-source           $31.9              0.5%             85.5%       Intravenous
                                                       (Adriamycin)   breast, ovarian, bladder, thyroid,                                                                              injection
                                                                                lung, lymphomas, stomach
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2352                                            Octreotide acetate        Acromegaly, carcinoid tumors,      Sole-source           $30.6              0.5%             86.0%   Intramuscular or
                                            injection (Sandostatin)             VIPomas, severe diarrhea                                                                           subcutaneous
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J0585                                               Botulinum toxin             Dystonia, strabismus and      Sole-source           $28.6              0.5%             86.5%     Intramuscular
                                                  injection (Botox)            blepharospasm, spasticity
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    TOTAL        $5,558.4             86.5%             86.5%               N/A
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    *Does not include Epoetin for ESRD or any other drugs paid for by intermediaries.
   **Type of competition based on the 202 OPPS pass-through drug classification.
  ***Allowed Charges are what Medicare allows before application of deductible and coinsurance.
   Source:




                                       Facts and Comparisons, 2001

                                        USPDI, 2002

                                        FDA Orange Book



                               

    Chairman JOHNSON. There are two other issues I wanted to 
bring up. One is that I do not believe you have the authority, 
and you indicated that it is not at all clear to you whether 
you have the authority. I think you have the authority to 
compete prices. I think at least that may be less difficult. I 
would worry about your competing prices and changing prices 
without the authority to take the money saved and use whatever 
portion the data indicates to reimburse for practice expenses 
without putting that money into the big pool of practice 
expense dollars where it would be averaged across every other 
physician and increase practice expenses for every physician in 
every discipline and not adequately increase oncologists.
    So as you approach this problem, are you looking at 
defining in the law clearly that the practice expense money 
used to reimburse for the drugs whose price we are going to cut 
will stay with the physicians who have those practice expenses, 
and not allow that money to sink into the general pool from 
which practice expenses for every other practicing physician 
affected by Medicare are reimbursed? Do you think that you have 
the authority, and are you committed to achieving that goal?
    Mr. SCULLY. Well, we are certainly committed to achieving 
the goal. We would certainly like to make the fix in a context 
where we do not have a negative 4.4-percent pot, first of all. 
I think it is clearly appropriate to put the practice expense 
funds back where they are needed, and there may be other 
categories, but as I said, oncology is probably number one. 
Other areas we have identified that rely on AWP for margins are 
hematologists and dialysis facilities. We clearly think that 
you should put the money back in where there is a problem. I 
think we are committed to doing that.
    It is unclear, and I have spent a lot of time on it, 
legally whether we--how we can do that. It would be a lot 
cleaner and a lot better if Congress directed us to do it that 
way.
    Chairman JOHNSON. We will need to direct you to do it that 
way, but we will also need help on the clarity of the law. We 
have spent hours and hours on this. It is hard to define those 
dollars, keep them in the pool that will reimburse the people 
appropriately, then have our clean savings, and then maintain 
that after year one.
    So this is an issue that if we do not address correctly, it 
will, without question, close cancer treatment centers across 
the country. Our hospital-based cancer treatment facilities are 
not capable of absorbing the number of patients that need 
attention, nor would they provide access to elderly people who 
often are not able to drive themselves. So, the access issue is 
critical. We are blessed to have developed this system that 
provides greater access to cancer care than any other Nation 
provides its elderly, or its citizens. So, we want to be sure 
to do this right. It does need to be done, but it must be done 
correctly.
    Last, in your experience with bidding drug prices, what 
standards are you finding you will need to include to prevent 
things like the following? This is an example that comes to me 
from California, where they have had some experience in this.
    The health plan changes the drug that it is going to offer 
for a patient, a cancer patient, monthly depending on where 
they get the lowest price. Now, that can be very difficult for 
the continuity of care. That is one problem. The second problem 
is that sometimes they take the powder form, because it is the 
cheapest, but that takes 20 minutes in a shaker machine in 
order to dissolve the powder form into an injectable component. 
It does come in a liquid form. So, if you just look at price, 
you are going to shift some very significant personnel costs on 
providers. That is not fair. We have to be able to deal with 
that.
    Secondly, mail order alone does not work. Mail order can be 
delivered to your doorstep and sit in the sun and have no 
effect afterward or be badly affected. Some of these are very 
toxic agents, and how they are delivered, when they are 
delivered, and the physician having ample lead time so that if 
a drug needs to be complemented by another drug to address 
white cell problems, that drug is also there, is important.
    So, these problems are real. They have been experienced by 
physicians who are dealing with plans that competitively bid 
cancer drugs. We cannot go nationwide with a program that does 
not set some standards in regard to what kinds of costs could 
be forced on a physician, what kinds of disruption in 
continuity of care can be tolerated, and what the standards 
must be for certain kinds of drugs in terms of mail order 
delivery and handling, because if some of these drugs are not 
managed by the wholesaler in an appropriate fashion, they will 
not do the job. They will be compromised in their 
effectiveness. Some oncologists actually go and check the 
wholesaler. They make unannounced visits to see that the drugs 
are well managed.
    So far, we do not have an example of a competitive bidding 
system in which there are such quality controls. Has your 
agency gotten into this? Will you be able to work with us on 
this issue of quality controls?
    Mr. SCULLY. Sure. I think whether it is the DME competitive 
bidding where you are doing it or whether it is drug 
competitive bidding, it is going to take a number of years to 
phase it in rationally. I do think there are some benefits to 
it.
    Clearly, we are not trying to just get low prices. The drug 
that I mentioned, Albuterol, we had 30 bidders, and we took 11. 
I think in the past, we had very little oversight of who was 
selling it, and in the competitive bidding process, we have a 
site inspection and probably more oversight of the people who 
won the bids. So, in some ways, we are more involved in the 
process of overseeing the people that are actually selling the 
drugs. Clearly, by having a third of the bidders win, quality 
is every bit as big a factor as price, which I think we need to 
be clearly focused on.
    In the case, I believe, of the San Antonio demo, we 
actually hired an ombudsman, a third-party ombudsman, to accept 
complaints and do independent review of what is going on. So 
there are clearly ways--I think there are ways that, 
potentially, you could have better oversight and better 
quality, and at the same time create at least some pressure to 
get better prices.
    Chairman JOHNSON. Thank you. I look forward to working with 
you. It certainly is disturbing that things like Leucovorin, 
and the calcium have a spread of 6,581 percent. So, I do not 
differ with you that this is a problem that we need to address, 
both out of fairness to the taxpayers----
    Mr. SCULLY. If I can just give you one more example, and I 
do not want to pick on them, because I actually had good 
results, but I had, I think, a fairly important cancer drug 
that came in with an AWP a couple months ago of $28,000, 
because I am sure that is what they thought was a neat price. I 
found out that the VA was paying about, depending on how you 
calculate it, $12,000 to $14,000. This happened to be the in 
outpatient setting. We came to a very good resolution which 
will not be final until the rule comes out, but I think we 
actually ended up determining pretty close to a reasonable 
price.
    The bottom line is, in most cases, had this drug not been 
$28,000, and the vast bulk of them are not, they are usually 
$300, and I had not happened to notice it because it was so 
huge, which is almost by accident, people make up AWPs. 
Whatever they just happen to think is a great price goes in the 
Red Book as an AWP, and we pay it. That is a crazy process.
    In this case, because it was such a high-priced drug and it 
happens to be, I think, a pretty good cancer drug, I think we 
talked to the company and came up with a very rational result 
that will pay an appropriate price and give great access to 
patients. What scares me is how many of the other ones that are 
not that big that we do not notice that just come through and 
get paid for automatically. It is a crazy process.
    Chairman JOHNSON. I absolutely agree with you. We are very 
careful in what we pay for every other purchase in Medicare, 
and we should be careful about what we pay for drugs.
    The VA example that you give is very important, though, for 
people to remember. We appropriate dollars to the VA to deliver 
the drug to the patient, and that is the practice expense issue 
that we also have to give equal time to.
    Mr. SCULLY. I had the VA's budget for 4 years in the last 
Administration. I do not mean to compare the VA price. It is 
one of many indicators. It was a flag for me that----
    Chairman JOHNSON. Absolutely.
    Mr. SCULLY. The VA has a totally different delivery 
mechanism.
    Chairman JOHNSON. Mr. Stark?
    Mr. STARK. Thank you, Madam Chair.
    I gather that you have outlined what you could do if we do 
not act, but you do not think it would be as effective because 
of reserving the savings to adjust the payments to the 
providers. I also gathered in your testimony, I think you said 
or indicated that you thought it would be best to go currently 
with actual cost and build the payment constraints on that, 
looking forward to moving to a competitive bidding system, is 
that a summary of----
    Mr. SCULLY. I think I tried to say, Congressman Stark, all 
year to the three Committees involved is that we just want to 
get something done, and we are interested----
    Mr. STARK. I think I heard you say that you could get into 
using the actual price more quickly and then move on, perhaps, 
it would take some time to work on a bidding----
    Mr. SCULLY. I think in the short term, you could clearly 
make an argument that going to an average manufacturer's price 
(AMP) or ASP-type price clearly delivers the quickest change 
and probably the quickest savings. My only concern there is if, 
and obviously there are a lot of interested parties in this, if 
they get locked into a new price, like an ASP or AMP, for 
years, they will come back and say, we do not need to do it 
anymore. You have got whatever your number is. I believe in the 
long run, a more competitive market-based approach is probably 
going to work better.
    Mr. STARK. They are both market based, I mean. It is a 
question--I am curious. The GAO is going to tell us that the 
Albuterol, you said you could save 25 percent in your 
experiment, and GAO tells us that 85 percent discounts are 
generally available. What is wrong with using the generally 
available discounts? Is there something wrong with the people 
who are buying it that way and saving 85 percent instead of 25 
percent?
    Mr. SCULLY. My view is we should find the best price we can 
pay and try to save as much money as we can.
    Mr. STARK. Consistent with getting quality drugs.
    Mr. SCULLY. Yes.
    Mr. STARK. Let me confess, and this is a very difficult 
confession to make, but I am unaware, probably because I do not 
pay enough attention, but I am unaware of the proposal that our 
Committee is now considering for competitive bidding, mostly 
because they have not shared it with the minority. I am aware 
of the bills that would take various average pricing. Could you 
summarize for us what you see as the current difference in 
these programs, and what are the problems we would have to 
solve if we go to bidding? As I say, this is something we have 
never discussed, and I would be interested in getting your read 
on it.
    Mr. SCULLY. I am not sure the competitive bidding approach 
has been sketched out in detail with the Administration, 
either. We have talked about it because we have been asked by 
various committees, because I have a lot of staff who have 
spent years on this, to think about different approaches. I do 
not think it has gotten much more than conceptual, certainly 
nothing written I have seen.
    I think the basic concept is similar to the DME-type thing: 
in major metropolitan areas in particular, over the next few 
years, that we would--essentially, we did an Albuterol for 
large-volume drugs, go out and have competitive pricing 
opportunities. I think the problems you have there are similar 
to what we have in other competitive bidding. In rural areas 
and smaller towns, it is going to be more difficult, and you 
probably have to have some kind of--what I believe our 
alternative would be is kind of have a market-based pricing 
mechanism.
    Mr. STARK. That is what I was going to ask you. Where 
Kaiser, say, in my district has got half the people, they can 
get probably a lower bid than the pharmacist in Susanville, 
where they have got a 10-bed hospital. Whereas we could average 
the price that Kaiser gets, with the Susanville price, we would 
get somewhat lower. Whether it would be lower for more or fewer 
people, I do not know. That is a problem, I gather, unless you 
have a winner-take-all, which I gather the industry would 
object to.
    Mr. SCULLY. I am not sure that is--our approach, I think, 
is generally to--in a place like San Antonio, you can have 30 
bidders and pick 11, I think you are probably going to get a 
result. In a rural area, I am not sure it is--we are going to 
be concerned about having one bidder.
    I do think, however, that most of our carriers are Blue 
Cross plans. If you talk to Palmeto or River Bend, which is 
South Carolina or Tennessee, they have millions of people who 
buy the same drugs under 65 years old. It is not that difficult 
to figure out what the market for under-65-year-olds are. In 
many cases, our contractors are not allowed to do that.
    I think it is certainly possible to measure what the prices 
are for people in commercial plans, and frequently these are 
the same contractors we use, and pay what the commercial rates 
are instead of a made-up rate.
    Mr. STARK. Do you envision picking one contractor in an 
area?
    Mr. SCULLY. No. The only thing we envision, as an 
administrative situation in the short run, if Congress did not 
act, is we would probably pick--we have 23 Part B carriers that 
do this now. They do it independently. We have been trying to 
get all 23 of them, for a variety of reasons, to communicate 
better. What we would probably do is pick whoever we thought 
was the best one, had the best staff and the best information, 
and say for the other 23--AWP is different in all 23 right now. 
We could at least pick one and say, ``This is the reference 
price. If you want to pay differently, explain to us why.''
    Mr. STARK. Thank you. Thank you, Madam Chair.
    Chairman JOHNSON. Mr. McCrery?
    Mr. MCCRERY. Thank you, Mr. Scully, for joining us this 
morning. Frankly, between your testimony, which was excellent, 
and your responses to the questions from Mrs. Johnson and Mr. 
Stark, I do not have a whole lot of questions left to ask. 
However, let me explore a couple of things.
    First of all, Mrs. Johnson was adamant that CMS research 
the extent to which the practice expenses should be bolstered 
to make up for the drop in the AWP or in the price for the 
drugs, and I am wondering how much research CMS has done or how 
much research you have access to that would allow you to 
accurately make up that difference?
    Mr. SCULLY. I think the whole system--arguably, the 
physician fee schedule, relative value units (RVU), which I 
have been involved in, as have many on the Committee, for 15 
years, is never perfect. As I said, the GAO report, I think, 
said $49 million. We said $52 million earlier in the year. We 
spent a lot of time with the oncologists since. We have a lot 
more data. The number is probably a little higher than that. I 
am sure it will never be perfect, but I am pretty confident we 
have a lot of different reference points to figure out the 
right amount, and----
    Mr. MCCRERY. For every specialty?
    Mr. SCULLY. Probably--certainly for oncology, we spent a 
lot of time on it. I think we have a fairly good idea for 
hematology, which is smaller, and probably not as good for 
dialysis facilities, but I think we have a pretty good idea. 
There may be others that I have not mentioned, but those are 
the three that I have had flagged by the staff as the biggest 
problem areas.
    Mr. MCCRERY. Does CMS plan to do a continual review of the 
practice expenses, the changes in technology, the changes in 
office set-up and all the things that one has to look at?
    Mr. SCULLY. It is pretty controversial every year with the 
physician community as it is, so I think we are constantly 
reviewing, especially in the practice expense guidelines, which 
the Secretary withdrew earlier this year. We work with all the 
specialty groups through the Relative Value Update Committee 
(RUC), which is done on the guidance that we convene all--the 
Resource Utilization Committee, which makes all the 
recommendations for all the RVUs and practice expenses every 
year. I think we continually discuss this all year long in 
Committees with all the specialty groups. So, we are very 
focused on it.
    I think because of the cross-subsidy in oncology for AWP, 
even the RUC has acknowledged that over the years--I think 
everybody acknowledges it--there has been an underpayment for 
practice expenses and for AWP.
    Mr. MCCRERY. Speaking of subsidies, you mentioned that you 
could easily look at the under-65 population and get an 
accurate reflection of the price of a drug. Is it not true that 
that drug, that under-65 population could be subsidized by the 
reimbursement from Medicare, which is vastly overblown?
    Mr. SCULLY. Yes, but I think, and we had this discussion on 
the prescription drug issue--it may sound unrelated, but I am 
not sure it is--on our drug card. Seniors pay the highest cost 
for drugs right now, and I think if they were organized, they 
would pay--we think they would pay 15 percent less. Do we 
expect prices to go up as a result for people under 65? Yes. 
Right now, seniors are cross-subsidizing non-seniors, and I 
think, arguably, if we squeeze the price of AWP down, do we 
expect there might be some increases in the commercial market? 
There probably would be. Clearly, we are vastly overpaying 
right now.
    Mr. MCCRERY. Yes, we clearly are, but my point is that the 
under-65 price does not necessarily reflect the true market 
price because it is being subsidized by the artificially high 
price that they get from Medicare.
    Mr. SCULLY. Yes.
    Mr. MCCRERY. What I am really getting at here is that this 
whole thing is a mess.
    [Laughter.]
    Mr. MCCRERY. I was down in Shreveport visiting the 
pathologists, and they are concerned about the technical 
component of their reimbursement being considered to be in the 
Diagnosis Related Group (DRG). There are scores of examples of 
that type of judgment that CMS has to make, that we have to 
make, and in my view, the market should be making. Would it not 
help a lot if we were to adopt the recommendations of the 
National Bipartisan Commission on Medicare and go to a premium 
support system that the market then would make these decisions 
rather than a bunch of people sitting up here that have not a 
whole lot of knowledge of all the intricacies of those market 
decisions?
    Mr. SCULLY. Well, Congressman, as I think you probably 
know, philosophically, I completely agree with you, and I think 
that, as I mentioned, Blue Cross of South Carolina, Blue Cross 
of Tennessee, all these companies make these judgments every 
day in the under-65 market. In the over-65 market, CMS fixes 
prices. I think that will probably continue for a while. With 
the system we have, I will be the best price fixer I can be.
    We clearly think that, obviously, in the long run, that the 
under-65 market, the Blue Cross plans and other insurers make 
these judgments, and we think they probably make them more 
accurately than we do. We are stuck with a not particularly 
good system, and we are trying to make the best of it. I 
totally agree with you.
    Mr. MCCRERY. [Presiding.] You have my sympathy. Mrs. 
Thurman?
    Mrs. THURMAN. Thank you. Thank you for being here. Until 
the last question, it sounded like everything was going along 
just pretty good here.
    [Laughter.]
    Mrs. THURMAN. I would say it is heartening to hear that we 
are all kind of on the same page here. I happen to have had an 
opportunity just a couple of weeks ago to visit a cancer 
center, and many of the issues that we are talking about here 
certainly were a part of our discussion and their concerns. 
Certainly, the nursing staff at the center was, I mean, by far 
the best, along with the doctors, but they are just saying they 
cannot continue to do what they are doing because of the cost 
of the practice and doing the service.
    So, I do think we need to get to the bottom of this and 
figure out, and I think we should be honest about it. I think 
we should say, you do this work and this is what you get paid 
for. This is what the drugs cost, and we cannot hide this stuff 
anymore. So I would say that.
    I am curious within some of the staff that you have talked 
about, if they have looked at all, if we were to fix this, 
because of the 25 percent of Medicare beneficiaries that have 
Medigap? Would there be a reduction in cost for them, as well, 
or could our premiums go down in that area? Has anybody looked 
at that?
    Mr. SCULLY. I am not sure we have calculated the details of 
that, but clearly in the physician office, it is usually at 
least 20-percent co-insurance.
    Mrs. THURMAN. Right.
    Mr. SCULLY. So if we had a significant reduction in prices, 
let us say it is just 15 percent, then seniors save 20 percent 
of that. In the outpatient setting, as you know, the copayments 
are all over the board, but we have a long-term policy to fix 
it, which Congress passed. I think we are still looking at 
probably 45-percent average copayments. So, in the outpatient 
setting, seniors are paying frequently 45 percent of the drug 
prices. Clearly, there would be some savings to seniors.
    Mrs. THURMAN. So, we could suggest in the Medigap that they 
need to be looking at some cost reduction if this were fixed in 
that way.
    Mr. SCULLY. Yes.
    Mrs. THURMAN. Second, I want to thank you for meeting with 
some of our constituents, I guess, with the University of 
Florida and others on the protein bead issue. Can we fix this 
at all? This also is an issue of payments on cancer therapy.
    Mr. SCULLY. This has to do with our extremely popular 
pending outpatient rule. My tongue is in my cheek.
    Mrs. THURMAN. I believe it does have something to do with 
your extremely popular----
    [Laughter.]
    Mr. SCULLY. The outpatient rule, as I think a lot of the 
Committee know, I was involved in, when I was not in the 
government, is incredibly complicated. It has got a lot of 
problems. We are getting better at the pricing every year.
    When we did our draft rule that came out on August 8, 
essentially, we took 60 million claims and we pushed the 
button, and the computer spit out the right rates. There were 
many price changes, and I think many of them legitimate, for 
drugs and devices that went down. As I mentioned, the benefit 
is colonoscopies, emergency room visits went up.
    For the final rule, we have culled through the data, met 
with, I think, lots and lots of people from the industry, 
including a number of people from Florida and a number of other 
medical centers about proton beam devices. I have tried to be 
very open to everybody in the world that wanted to come and 
meet with us. We are using a lot narrower chunk of the data 
that we think is more accurate, about 45 to 50 million claims. 
I think you will see a lot of device-related and drug-related 
ambulatory payment classifications (APC) go up in the final 
rule, and I think the calculations will be far more accurate. I 
probably spent 2 or 3 hours a day on this every day.
    I do not think everybody in the world will be happy. I 
think the final results of that rule will be probably more 
accurate. On a relative basis, people will be happier with the 
final rule than they were with the draft rule. My guess would 
be that particular payment is probably one of them.
    Mrs. THURMAN. Then just last, as you can imagine, we are 
starting to hear from our nursing homes. I know this not the 
subject of this hearing, but we need to give some idea back to 
folks at home on the nursing home issue, because I believe they 
took their 10-percent cut in payments. I just wondered if we 
are supportive of efforts in Congress to eliminate or postpone 
these 10 percent cuts.
    Mr. SCULLY. Well, in fairness, I do not think it is fair to 
portray it as a cut. I have a lot of friends in the nursing 
home industry, and I have had this friendly debate with them. 
In fact, I would note that I have hired--this is a little bit 
off-track, but I hired a number of Wall Street analysts who 
work for CMS who look at the relative health of the industries 
from public information. We put out a very detailed 45-page 
report on the health of the nursing home industry and these 
add-ons--and what would happen if they went--and they are on 
our website. I think it is very accurate, and I will be happy 
to send it up.
    We have done the reports on hospitals. We are putting out 
one tomorrow or Monday on devices. We have done them on nursing 
homes, on home health, and my view is that we have 
responsibilities regularly just to figure out how people are 
actually doing--if they are making a reasonable margin or if 
they are losing money. We are trying to figure out accurately 
from publicly available information how they are doing, if it 
is the right thing.
    In the nursing home field, largely based on that report 
that we did earlier this year, Congress spent $12 billion a 
year on Medicare nursing homes, and we added $3 billion in 
temporarily. The Administration had the discretion to continue 
$1 billion, and we did that earlier this year. Congress is 
talking about adding back what are add-ons and the House bill 
added on about another $1 billion. The Senate did about the 
same. I think that we are up in the air about that, whether 
that should be done or not.
    Chairman JOHNSON. [Presiding.] Mr. English of Pennsylvania.
    Mr. ENGLISH. Thank you, Mr. Scully. At the risk of missing 
a procedural vote, I do have a question that I wanted to pose 
to you.
    A lot of the discussion about AWP reform is focused on 
cancer treatments and oncologists, which is one of my areas of 
interest. Is it not true that there are also some other types 
of non-cancer therapies that should be included in discussions 
to ensure that all patients continue to have access to 
medically necessary therapies? Can you tell me the other types 
of health care providers, disease states, and drug therapies we 
should be keeping in mind as we design policies to ensure 
patient access, and what other types should we be taking into 
account?
    Mr. SCULLY. I think there are a lot of different provider 
areas that may have small impacts from AWP, and we are 
certainly willing to work with the Committee to identify those. 
I think the big dollars are largely in oncology, probably the 
second biggest is in dialysis facilities who also rely on 
margins from AWP, and hematologists, the third. I think almost 
every physician, to some degree, that administers drugs 
probably has some beneficial cost-shifting benefit from AWP. I 
think those are the three big areas.
    Mr. ENGLISH. My impression is that there are some others 
that would also be impacted by AWP, including osteoarthritis, 
rheumatoid arthritis, multiple sclerosis (MS), acquired immune 
deficiency syndrome (AIDS), and anemia. Have you solicited 
input from any non-cancer physician provider groups about these 
issues?
    Mr. SCULLY. We have, and I think some of the ones you 
mentioned, clotting factors is one very large one. I mean, we 
are more than happy to meet with any of them and discuss any 
appropriate data they have.
    Mr. ENGLISH. Very good. Thank you, and I appreciate your 
participation today. I also want to thank you again for coming 
to Northwestern Pennsylvania to help us with some of the 
reimbursement reform issues and hope to be able to host you 
there again.
    Mr. SCULLY. I am happy to do it. Thanks.
    Chairman JOHNSON. Thank you, Mr. Scully. I would hope that 
as you look at some of these other areas, that you also give 
some attention to the issue of respiratory therapists. The role 
that respiratory therapists play in home care is something we 
need to better understand in making these reimbursement 
decisions.
    Also, I would like to comment for the record that I am 
concerned about your references to the GAO study and their $49 
million. Having spoken with them at great length about their 
study, they also would acknowledge that their sample of 
oncologists was very small and that it under-represented the 
office practice delivery of chemotherapy. Eighty percent of all 
patients receive their care there. They included in their study 
not only surgeons, who just do cancer surgery, but also 
hospital-based cancer treatment facilities whose reimbursement 
structure is different.
    So I think, in spite of the fact that I put the provisions 
in that asked for the study, not only are these results we 
can't use, but they acknowledge themselves that they did not do 
what you did in my district. You went into an office practice 
and see what the expense of the temperature-controlled 
containers are, what you have to keep on hand, the Occupational 
Safety and Health Administration, OSHA, prescribed hoods under 
which you have to manage the dosages, the waste, because once 
you open something, you have to throw the rest away.
    So, there are a lot of costs associated with delivery that 
they explicitly did not look at. Whereas, the Gallup survey 
results that the oncologists have finally completed and have 
gone to Lewin, who I think is your contractor, do go to those 
issues.
    So, I hope that since it is the same methodology as is 
normally used and so on and so forth, that we take that data 
extremely seriously so that we do not make a mistake, because 
this is an area in which we really cannot afford to do it 
wrong. As important as it is for the government to start paying 
for drugs properly, it is every bit as important for us to try 
to pay accurately in an area where we have never paid. So, this 
is new territory, and because it is new territory, it must be 
an add-on to the practice expense pool and not a part of that 
practice expense pool.
    So, I hope you will have your legal staff begin helping us 
define the legal structure that we need to keep that money 
available for the purposes for which we need it. If we free it 
from the drug payment structure, we will be able then to both 
pay fairly for drugs and pay fairly for delivery.
    Congresswoman Dunn, I am glad you got back.
    Ms. DUNN. Thanks.
    Chairman JOHNSON. We expect to have an hour after this 
vote, so we wanted to keep going.
    Ms. DUNN. Thank you very much, Madam Chairman. Thank you, 
Mr. Scully, for coming today.
    I want to take an opportunity today to ask you a couple of 
questions that have to do with reimbursements. In the State of 
Washington, we continue to be concerned about the inequitable 
payments for managed care plans and physicians, and find that 
we increased funding for both of these groups in the Medicare 
prescription drug bill that the House did pass earlier this 
year, but we are particularly concerned in my State about the 
inequities that are due to geography.
    I am hopeful that as we look at this issue--this is a 
continuing long-term issue--that we will be able to work 
together and find legislative and administrative answers to 
solving our problem dealing with the parity in payments. I 
would like today to get your commitment to work with me and 
other Members of the Congress who are eager to get this 
situation squared away in order to address these inequities.
    Mr. SCULLY. Absolutely. As I said when I was in Seattle 
earlier in the year, when we spent a day hearing from a lot of 
people about this, I think the Medicare+Choice rates, which 
were significantly improved in the House bill. The 
Administration has a strong interest in getting those rates 
more effectively targeted this year, I think there is a fairly 
significant increase in the House bill. I think we had 
continued erosion in Medicare+Choice nationally, but I know in 
Seattle, you have got a major problem for the plans in the 
State, and I have tried to keep them in. They have been raising 
premiums, and it is all due to the rate repayment. We are very 
concerned about that.
    We are also concerned about how the area rates are set and 
why they are significantly higher in some regions and lower in 
the others. We are committed to working with you. Equally on 
the hospital wage index and the physician geographic practice 
cost indexes or GPCIs, it is called, that are regionally 
varied, there are a lot of different components that go into 
that and most of them are legislative. We are very happy to 
work with you to make them more accurate.
    Ms. DUNN. That is good. That is really important. As we see 
plans raising their premiums, which is my great worry in our 
State, where we have lost too many plans already, the 
willingness of the Administration to work with us on remedies 
is very much appreciated. I will look forward to that.
    Also, when you were in Seattle, we worked on another issue, 
which is the reimbursement for certain drugs. Of course, that 
is what we are talking about today. Right now, the Medicare 
Program is paying 95 percent for certain drugs that are 
biologics. Some of these drugs that are biologics are very 
expensive. Self-injected versions already exist in the market 
that may be cheaper and allow more choice to patients. For 
example, we have self-injected biologics that can treat 
multiple sclerosis or rheumatoid arthritis, but these are not 
currently covered by Medicare.
    I have introduced legislation to allow Medicare coverage of 
self-injected biologics as a substitute for covered drugs or 
biologics. One way to reduce costs of drugs, of course, is to 
encourage competition by allowing replacements of a self-
injected biologic in the place of a covered drug. Even with a 
comprehensive prescription drug bill, we still need to address 
AWP as we try to find a solution for that much larger problem.
    I hope that we can do something to reduce costs by 
encouraging competition. I would like to just probe your 
thoughts today on allowing coverage for self-injected 
biologics, which do cut costs in the long run because they take 
the burden off the clinics, off the hospitals, off the 
physicians, yet are not currently covered.
    Mr. SCULLY. Well, this is another complicated problem. As 
you know, we went through a very detailed program guidance 
earlier this year on self-injectables. The current law says 
that we pay for outpatient drugs that are not usually self-
injected, which after great mounds of legal advice, we 
determined meant they had to be done in an office more than 50 
percent of the time. That brings up some very strange results.
    For example, with MS, we determined--the good news is, for 
a drug like Avonex, which is only covered in about half the 
country, it is now covered everywhere, which is a very 
prevalent MS drug. That was because we determined in a national 
survey that more than half the time, it was done in a 
physician's office.
    A number of other very successful MS drugs, some of which 
are taken by friends of mine, were not covered because they are 
generally not self-injected, so they were not covered. 
Similarly with rheumatoid arthritis. Remicade and Enbrel are 
two great drugs. After our survey, we covered Remicade, I 
believe, and did not cover Enbrel for the same reasons.
    You can certainly make a good argument that that, policy-
wise, does not make a lot of sense, and we are more than happy 
to talk about it. We made the determination that we think we 
followed the law as clearly as we possibly could and clarified 
coverage as much as we could to, I think, the benefit of a lot 
of patients. Clearly, we do not believe under current law we 
can pay for drugs that are not usually--that are usually self-
injected.
    Ms. DUNN. Thank you very much, Mr. Scully. I do want to 
just give you one example of where we could be saving some 
money by covering both those drugs for rheumatoid arthritis. 
The covered drug is $17,000. The self-injected version is 
$15,000. It would be a savings of about $2,700. So, we will 
continue to make our case, and I appreciate your willingness to 
listen to us and possibly at the proper time act to include 
these drugs as choices for others that are currently included.
    Mr. SCULLY. I try to be sensitive to all these things, but 
as you know, I have rheumatoid arthritis, so that one I know a 
lot about. There is a very good policy argument for that.
    Ms. DUNN. Thank you. Thank you, Madam Chairman.
    Chairman JOHNSON. Mr. Ramstad?
    Mr. RAMSTAD. Thank you, Madam Chair, and thank you, Tom, 
for being here today and for spending as much time discussing 
with me the outpatient rule, particularly as it relates to 
procedures using technology. You know my concerns. I am very 
concerned that the proposed outpatient rule will cut 
reimbursements for medical devices, which means that these 
reductions will negatively impact Medicare beneficiaries' 
access to new medical procedures. I believe seniors should have 
the same access to medical devices, to procedures using medical 
technologies that other health care patients enjoy.
    I guess my concerns can be boiled down to two principal 
concerns. First of all--and they both relate to the methodology 
used to determine 2003 rates. As we have discussed, the 
inaccuracy of hospital data, I think, is obvious, the problems 
there. Second, the underlying methodology using the cost-to-
charge ratio.
    Now, I know we have talked about the third-party data that 
CMS has been presented. Are you willing to use third-party data 
where appropriate? That is my first major question.
    Mr. SCULLY. I think this is--as I said, I am spending 
probably 2 or 3 hours a day on this and have for the last 
month. I am confident that the final rule will have accurate 
payment. We really cannot use third-party data except to figure 
out where we are just wrong and need to go back and scrub our 
own data more. We have 60 million claims, as I mentioned. We 
are only using a little under 50 million claims. We used 60 in 
the draft rule.
    The reason we use third-party data, and we have used a lot 
from the drug companies and device companies, is to figure out 
where our calculations from our data are just way off, and in 
many cases, they have been. In addition, I also called up the 
three very large buyer groups, and we cannot use their data, 
either, but I called them up and I identified personally about 
35 drugs and devices that seemed to be way off. I called up 
independent buying groups and confidentially they gave me the 
prices they pay in the market. We have used that to further 
target places where our data might have been off.
    The bottom line is that we are using lots of independent 
data, more than anything else, to figure out outliers where we 
may have made a mistake. It is clear to me we have way overpaid 
for a lot of things last year. I am confident when the final 
rule comes out that we will have appropriate prices for 
virtually every procedure that includes a device.
    Mr. RAMSTAD. When I look at the 2001 data, which shows the 
pass-through pool is about half the size that CMS projected for 
2002, even assuming the billings would increase by 50 percent 
from 2001 to 2002, the pro rata reduction was at least a third 
larger than it needed to be. As far as the underpayments are 
concerned, would you use the authority that we gave you to 
compensate underpayments in a previous year to increase this 
year's conversion factor? Is that----
    Mr. SCULLY. This system is so complicated. I have been 
working on Medicare for over 20 years, and there has never been 
any law passed more complicated than this one. I am not sure--
we still do not know for 2001, because I went through this--
this morning with the staff. We are not certain exactly how 
much we spent in 2001, much less 2002. So, I am not sure we 
could make an accurate calculation.
    The good news is, I do not believe at this point, and the 
regulation comment period does not close until October 8, and 
we do not want the rule out until November 1, but my guess is 
right now that for this year, we will not have to have any pro 
rata reduction and that we will be able to live with it in the 
pass-through pool. I think as every year goes on and we get a 
little better at calculating both the rates and what we are 
likely to spend, we will be more accurate. At this point, I am 
not sure we could, even if we wanted to, say we actually did 
not spend as much as we should have in previous years. We do 
not actually know exactly right now.
    Mr. RAMSTAD. In the regulations, CMS acknowledges that the 
deep cuts from 2002 to 2003 that I initially broached would 
likely impact access to new technology in the outpatient 
setting, as I said before, and that is my concern. How many of 
these APCs do you think you will be able to fix by the final 
rule, Tom? Are you willing to use your authority to keep some 
APCs within about 10 to 15 percent of their current year rates 
until more accurate data can be secured?
    Mr. SCULLY. I think we will have some mechanisms in the 
final rule to make sure that if there were any things that were 
real outliers, that they do not take too big a decrease. I 
literally have gone through personally every one of these 
devices of any significance in great detail, looked at the 
rates from past years, looked at commercial rates, and I am 
pretty confident.
    What we did last year, just to clarify, is--because we did 
not have any other data--we frequently called up companies and 
got their manufacturers' list price and put them in the rule. I 
think in some cases, I understand people in some places looked 
like they got a big cut. I also think that we clearly way 
overpaid for some devices in past years.
    The initial rule that came out this summer, which caused a 
lot of panic, probably, in many cases, came out with rates that 
were a lot lower than the final rule will be. As I said, that 
came purely out of essentially pushing the button and coming up 
with the computer data on 60 million claims that may not have 
been as accurate as we would like. We spent enormous amounts of 
time going through this device by device, drug by drug, and I 
am confident that when I sit down with you on November 2 when 
the rule comes out, that I can go through device by device and 
discuss every one, where we went with which price and that they 
will be fair.
    Mr. RAMSTAD. Let me just conclude, Madam Chairman, by 
saying I am very, very hopeful that you are willing to use your 
authority to keep some APCs within about 10 to 15 percent of 
their current year rates until the data are accurate. I think 
that, for the integrity of the system and the spirit of 
fairness, is very, very important, and I hope you will so 
agree.
    Mr. SCULLY. I would be happy to--I think when you--I am 
very confident--I spent a lot of time on this rule. I do not 
expect everybody in the country to be happy with it, but I do 
think trying to keep the balance, as I mentioned, because we 
clearly overpaid for a lot of things in previous years that 
hurt base hospital services like colonoscopies and emergency 
room visits. I try to keep that balance in mind, that we need 
to find the right amount to pay for it. We do not actually pay 
for devices. We pay hospitals a capitated rate for the services 
that include devices.
    I expect many of the ones that, you know, some of the 
bigger outliers, like defibrilators and others, I spent an 
enormous amount of time looking at various other sources, 
including our own data. I am confident we will come out with a 
fair payment.
    Mr. RAMSTAD. Thank you.
    Chairman JOHNSON. Thank you very much, Mr. Scully. I would 
appreciate it if you would get back to the Committee as soon as 
you can in terms of the lists of drugs that you think are going 
to be most impacted and the ones that are going to be least 
impacted, and also with language that you would suggest as to 
how to keep the practice expense money that we save from better 
competing the prices of drugs separate from other practice 
expense money so that we can allocate it to the purposes for 
which we need it.
    Thank you very much. I appreciate your being here today on 
this important subject.
    Mr. SCULLY. Thank you very much.
    Chairman JOHNSON. On our second panel, George Reeb from the 
Office of Inspector General (OIG), in the U.S. Department of 
Health and Human Services, will update us on his findings 
comparing AWP to actual acquisition costs.
    Dr. Michael J. O'Grady from Project HOPE, Health 
Opportunities for People Everywhere, will discuss a competitive 
bidding approach to establish Medicare reimbursements for 
outpatient drugs.
    John D. Jones from Prescription Solutions will discuss how 
drug reimbursements are handled in the private market.
    Dr. Paul A. Bunn, Jr., from the American Society of 
Clinical Oncology will tell us about the new information on 
practice expenses that the Society has collected and submitted 
for consideration.
    Kim Glaun from the Medicare Rights Center will present 
concerns from the beneficiaries' perspective.
    Thank you all for being here. I regret that we got a little 
late start, but we will try to keep going through any votes 
that might be called in respect for your individual schedules. 
Mr. Reeb?

STATEMENT OF GEORGE REEB, ASSISTANT INSPECTOR GENERAL, CENTERS 
FOR MEDICARE AND MEDICAID AUDITS, OFFICE OF INSPECTOR GENERAL, 
 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; ACCOMPANIED BY 
    ROBERT VITO, REGIONAL INSPECTOR GENERAL, EVALUATION AND 
            INSPECTIONS, PHILADELPHIA, PENNSYLVANIA

    Mr. REEB. Thank you and good morning, Madam Chairman. I am 
George Reeb, Assistant Inspector General for the Centers for 
Medicare and Medicaid Audits within the U.S. Department of 
Health and Human Services. I am accompanied today by Robert 
Vito, who is our Regional Inspector General for Evaluations and 
Inspections. We appreciate the opportunity to be here before 
you today regarding the important issue of Medicare payments 
for prescription drugs.
    My written testimony describes several Office of Inspector 
General reports that found Medicare and Medicaid paid too much 
for prescription drugs. I would like to briefly summarize that 
information for you.
    Medicare's current payment methodology adversely affects 
both the Medicare trust fund and Medicare's beneficiaries, who 
are responsible for a 20-percent coinsurance payment. This 
occurs largely because Medicare and Medicaid base reimbursement 
to physicians and suppliers on inflated average wholesale 
prices.
    Our work has consistently shown that published AWPs bear 
little or no resemblance to actual wholesale prices available 
to physicians, suppliers, and large government purchasers. In 
general, Medicare reimburses physicians and suppliers at 95 
percent of AWP. Similarly, most State Medicaid agencies 
reimburse pharmacies at AWP minus an average of about 10.3 
percent.
    Medicare's total payments for prescription drugs have risen 
steadily over the past decade. In 2001, Medicare paid $6.5 
billion for drugs, an increase of $1.5 billion from the 
previous year. Unlike Medicare, which currently covers a narrow 
range of drugs, Medicaid, as you know, covers most outpatient 
prescription drugs and total Medicaid payments were almost $24 
billion in fiscal year 2001.
    Over the past 5 years, the Office of Inspector General has 
issued a number of reports on Medicare reimbursement for 
prescription drugs. Medicare's coverage of outpatient drugs is 
limited primarily to drugs used in dialysis or in 
transplantation and cancer treatment. Physicians and suppliers 
purchase these drugs, administer or provide them to Medicare 
beneficiaries, and then submit the bill to Medicare for 
reimbursement.
    In our reports, we have compared Medicare reimbursement for 
drugs to prices available to the VA, to Medicaid, and to 
wholesale prices available to physicians and suppliers. For 
just 24 drugs that we studied, we found Medicare could have 
saved between $425 million to $1.9 billion a year by basing 
reimbursement on prices available to other sources.
    Although this hearing pertains to Medicare, I would also 
like to mention our work on Medicaid primarily because it 
confirms that AWP is not a realistic basis for drug 
reimbursement. Both our Medicaid and Medicare work serve as a 
red flag that if the Medicare prescription drug benefit is 
expanded, the current payment methodology could lead to 
billions of dollars in excess payments.
    In Medicaid, we found that there was a significant 
difference between the pharmacy acquisition costs for drugs and 
their published AWPs. In our latest report, we found that 
pharmacy acquisition costs ranged from 17 to 72 percent below 
published AWPs. These percentages are not considered discounts 
available to most pharmacies, such as volume discounts. We 
believe that if States would reimburse pharmacies for Medicaid 
patient prescriptions more in line with the actual acquisition 
costs of the drugs, substantial savings could be realized by 
the Medicaid program.
    Publishing artificially high AWPs can be used as a 
marketing device to increase the drug companies' market share. 
For instance, because physicians and suppliers get to keep the 
difference between their actual acquisition cost and the 
inflated reimbursement amount, this spread can serve as an 
inducement for suppliers or physicians to use one brand of drug 
over another. While inflating the AWP does not increase the 
amount the manufacturer receives for each unit of the drug, it 
can increase their market share by creating an incentive for 
physicians to prescribe the manufacturer's drug instead of a 
competitors. This occurs, obviously, at the expense of the 
Medicare Program and its beneficiaries.
    We have had some recent legal cases which illustrate some 
of the problems associated with Medicare's current 
reimbursement. Because the price spread is so large and 
Medicare reimbursement is so lucrative for the drug Albuterol, 
some mail-order pharmacies have made illegal kick-back payments 
to durable medical equipment suppliers for patient referrals 
and a $10 million civil settlement was had from one pharmacy 
group.
    In another legal case, Bayer Corp. agreed to pay $14 
million last year to resolve its liability in the Medicaid 
program. Although Bayer did not admit liability, the United 
States alleged that Bayer had knowingly set and reported the 
AWPs for these drugs at levels far higher than the actual 
acquisition costs for the majority of its customers and caused 
these customers to receive excess Medicaid reimbursement. They 
made misrepresentations to the Medicaid program for certain 
information that is used in the rebate programs and knowingly 
reported and underpaid the Medicaid rebates.
    In October of last year, the United States announced an 
$875 million settlement with TAP Pharmaceutical Products, 
Incorporated. The TAP allegedly reported AWPs for Lupron at 
levels that were far higher than the actual cost. They 
encouraged customers to bill for free samples they provided, 
and they paid kickbacks to physicians and were underpaying 
rebates to the Medicaid program.
    A drug reimbursement system should be based on real prices 
available in the marketplaces. Physicians and suppliers, 
including pharmacies, should be fairly reimbursed at levels 
that ensure beneficiaries have access to the drugs they need. 
We recognize that some physician groups say that overpayments 
for prescription drugs simply make up for inadequate payments 
for their practice costs. We agree that the physicians need to 
be properly reimbursed for the patient care. However, we do not 
believe that the payment for artificially inflated AWP prices 
is the appropriate mechanism because it just exacerbates the 
problem.
    We would be happy to answer any questions you may have.
    [The prepared statement of Mr. Reeb follows:]
  Statement of George Reeb, Assistant Inspector General, Centers for 
    Medicare and Medicaid Audits, Office of Inspector General, U.S. 
                Department of Health and Human Services
    Good morning, Madam Chairman. I am George Reeb, Assistant Inspector 
General for the Centers for Medicare and Medicaid Audits within the 
Department of Health and Human Services. I am accompanied by Robert 
Vito, Regional Inspector General for Evaluation and Inspections, 
Philadelphia. We appreciate the opportunity to appear before you today 
regarding the important issue of Medicare payments for currently 
covered prescription drugs. I am here to describe the findings of 
several Office of Inspector General (OIG) reports showing that Medicare 
and Medicaid pay too much for prescription drugs. This occurs largely 
because of the use of the average wholesale price (AWP) as the basis 
for calculating reimbursements to physicians and suppliers, including 
pharmacies. We have consistently found that the AWPs which Medicare and 
Medicaid use are not really wholesale prices. I will also describe 
settlements of two cases which included the issue of manufacturers' use 
of the AWP as a marketing tool, at unnecessarily high costs to 
taxpayers and beneficiaries.
Background
    For the most part, AWPs (which are not clearly defined by law or 
regulation) are compiled in drug compendia such as Medical Economics' 
Red Book. As our reports have indicated, the published AWPs that 
Medicare and Medicaid use to establish drug reimbursement bear little 
or no resemblance to actual wholesale prices available to physicians, 
suppliers, and large government purchasers.
    In general, Medicare reimburses physicians and suppliers at the 
published AWP less a discount of 5 percent (i.e., 95 percent of the 
AWP). Of this amount, Medicare beneficiaries are responsible for a 20 
percent coinsurance payment. Similarly, most state Medicaid agencies 
reimburse pharmacies based on the AWP of a drug less a discount which 
averages about 10.3 percent nationally. Federal regulations require 
that each State's reimbursement for a brand name or certain other drugs 
not exceed, in the aggregate, the lower of estimated acquisition costs 
or the providers' usual and customary charge to the public for the 
drug. Some states require a small copayment for each prescription 
filled by a pharmacy.
    The current cost to Medicare and Medicaid for currently covered 
drugs is in the billions. 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 2001, it paid $6.5 
billion. Between 2000 and 2001 alone, payments increased by $1.5 
billion. Unlike Medicare which currently covers a narrow range of 
drugs, Medicaid covers most outpatient prescription drugs. Medicaid 
payments for prescription drugs totaled almost $24 billion in FY 2001. 
Our reports, which I am summarizing in this testimony, have shown time 
after time that Medicare and Medicaid pay too much for drugs.
Medicare Pays Too Much--OIG Reports
    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. Physicians and 
suppliers purchase these drugs, administer or provide them to Medicare 
beneficiaries, and then submit a bill to Medicare for reimbursement. 
Medicare's current payment methodology for prescription drugs adversely 
affects the Medicare trust fund and Medicare's beneficiaries, who are 
responsible for 20 percent of the allowed amounts.
    Over the past 5 years, the OIG has issued a number of reports, all 
of which have reached the conclusion that Medicare and its 
beneficiaries pay too much for prescription drugs. For example, we 
studied the prices for 24 Medicare covered drugs ($3.1 billion of the 
$3.9 billion in Medicare drug expenditures in 1999) comparing Medicare 
reimbursement to prices available to the physician/supplier community, 
the Department of Veterans Affairs, and Medicaid. 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. 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.
    Subsequently, we updated the findings of this report with more 
current drug pricing information and estimated that, of the $3.7 
billion Medicare spent for 24 drugs in 2000, the program would have 
saved $1.9 billion if the drugs had been reimbursed at prices available 
to the VA. Over $380 million of this savings would have directly 
impacted 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. Further, we 
estimated that, if Medicare paid the actual wholesale prices available 
to physicians and suppliers for these 24 drugs, the program and its 
beneficiaries would save $887 million a year. If Medicare paid for 
these drugs based on catalog prices, beneficiaries would pay over $175 
million less in coinsurance. The potential total savings available to 
both Medicare and its beneficiaries is probably higher than our 
estimates, assuming data for all Medicare drugs is similar to that for 
the 24 we analyzed.
    In other reviews, we reported that Medicare pays nearly double the 
Medicaid price and almost seven times more than the VA for one 
milligram of albuterol, a drug used with a nebulizer to treat asthma, 
emphysema, and other respiratory problems. Nearly every chain pharmacy 
we contacted sold generic albuterol at prices less than Medicare paid 
for it. According to our survey results, any consumer could buy a 
monthly supply of albuterol from Internet pharmacies for around $63. 
For the same monthly supply, Medicare and its beneficiaries would pay 
$120, $96 from Medicare and $24 from the beneficiary. The VA's entire 
monthly payment of $17.50 for albuterol is less than just the 
beneficiary's $24 coinsurance payment under Medicare. 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.
    We also found that Medicare and its beneficiaries would save $279 
million a year if ipratropium bromide were reimbursed at the median 
price paid by the VA. The VA's purchase price has decreased 
considerably over the last 3 years, from $1.29 per mg in 1998 to $0.66 
per mg in 2001. In contrast, the Medicare reimbursement amount has 
remained constant at $3.34 per mg. We also found that Medicare would 
save between $223 million and $262 million a year if ipratropium 
bromide were reimbursed at prices available to wholesalers and 
suppliers. The median catalog price available to suppliers was $0.82 
per mg, the median supplier invoice price was $1.18 per mg, and the 
median wholesale acquisition cost reported by manufacturers was $1.20 
per mg.
    Aside from the obvious problem that AWPs can be arbitrarily 
inflated, resulting in inappropriate Medicare payments, the use of AWP 
as a basis for reimbursement in Medicare 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 the drug 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 
increases the profit of the suppliers or physicians who purchase the 
drug because, while not paying the artificially inflated AWP amount, 
they are reimbursed based on that inflated amount. While inflating the 
published AWP does not increase the amount the manufacturer receives 
for each unit of the drug product, the higher profits available to 
physicians and suppliers may lead them to purchase one brand of drug 
over another, thereby increasing a manufacturer's market share. This in 
turn increases the profits of the drug company. All of this occurs at 
the expense of the Medicare program and its beneficiaries.
Medicaid Pays Too Much--OIG Reports
    Although this hearing pertains to Medicare, I would like to mention 
our work in the Medicaid program because it confirms that the average 
wholesale price (AWP) is not a realistic basis for drug reimbursements. 
Our Medicaid work also serves as a red flag that, if Medicare is 
expanded to cover more prescription drugs, particularly those that 
beneficiaries can obtain from pharmacies, it would be unwise for 
Medicare to reimburse pharmacies at Medicare's current rate of AWP 
minus 5 percent (i.e., 95 percent of AWP).
    In Medicaid, we found there is a significant difference between 
pharmacy acquisition costs for both brand and generic drugs and the 
basis for most states reimbursement for drugs--the average wholesale 
price (AWP). We believe if states would reimburse pharmacies for 
Medicaid patient prescriptions more in line with the actual acquisition 
costs of the drugs, substantial savings could be realized by the 
Medicaid program.
    As a follow-up to our previous work, we conducted nationwide 
reviews of pharmacy acquisition costs for both brand name and generic 
drugs reimbursed under the Medicaid prescription drug program during 
Calendar Year (CY) 1999. Since most states use AWP minus a percentage 
discount, which varies by state, as a basis for reimbursing pharmacies 
for drug prescriptions, the objective of these reviews were to develop 
an estimate of the discount below AWP at which pharmacies purchase 
brand and generic drugs.
    We obtained pricing information from 217 pharmacies in 8 states, 
which resulted in an analysis of thousands of invoice prices that 
included both brand and generic drug products. We compared each invoice 
drug price to AWP for that drug and calculated the percentage, if any, 
by which the invoice price was discounted below AWP. Our estimates were 
that pharmacy acquisition costs for brand name drugs in 1999 was an 
average of 21.84 percent below AWP and for generic drugs an average of 
65.93 percent below AWP. These estimates were both higher than our 
previous 1994 studies of 18.30 for brands and 42.45 for generics.
    In each of these reports, we recommended that the Centers for 
Medicare & Medicaid Services (CMS) require the states to bring pharmacy 
reimbursement more in line with the actual acquisition cost of both 
brand and generic drug products.
    In response to comments made by both state Medicaid officials and 
industry representatives, we further analyzed the results of our 
studies of CY 1999 expenditures. This additional information was a 
breakdown of discount percentages for various brand and generic drug 
categories from single source innovator through drugs with and without 
Federal upper limits. Based on the results of our additional analyses, 
if states continue to reimburse for drugs based on AWP, we recommended 
that CMS encourage the states to consider using a multi-tiered 
reimbursement methodology. These tiers should be oriented to the 
significant differences in pharmacy acquisition costs depending on the 
drug's category of brand, generic, subject to Federal upper limits, 
etc. The current method used by most states for reimbursing for brand 
name drugs and non-Federal upper limit multiple source drugs using a 
single percentage discount does not consider these large differentials 
found during our additional analysis.
    The discount percentages in this report ranged from 17.2 to 72.1 
percent below AWP. These percentages do not consider discounts 
available to most pharmacies such as volume discounts, prompt pay 
discounts, and related rebates. The Medicaid program, unlike the 
Medicare program, includes a rebate component that is based, in part, 
on the average manufacturers' price (AMP). However, our report does not 
address the disconnect caused by basing Medicaid reimbursements on AWP 
while basing rebates on the AMP. That practice could result in higher 
cost and lower rebates for the States under Medicaid. In an earlier 
report we recommended tying the rebate to the AWP rather than the AMP.
Recent Settlements
    Recent settlements further illustrate some of the problems 
associated with Medicare's current reimbursement methodology. Because 
of the price spread is so large and Medicare reimbursement so lucrative 
for the drug albuterol, some 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 was reached with one pharmacy that 
engaged in this conduct. Issues of inflated AWPs were also associated 
with recent settlements involving Bayer Corporation and TAP 
Pharmaceutical Products Inc.
    Bayer Corporation. In January 2001, the United States settled a qui 
tam False Claims Act case with the Bayer Corporation, a major 
pharmaceutical manufacturer. Under the terms of a settlement negotiated 
by a team of Federal and state law enforcement officials, Bayer agreed 
to pay $14 million in order to resolve its liability to the Medicaid 
program. This case was investigated and handled by a team of Federal 
and state representatives--including the OIG, representatives of the 
Medicaid Fraud Control Units of four states and the Texas Attorney 
General's Office, the United States Attorney's Office for the Southern 
District of Florida, and the Department of Justice.
    Through this settlement, Bayer resolved its liability under the 
False Claims Act and the Medicaid Rebate Statute for its conduct in 
connection with six of its drugs between January 1993 and August 1999. 
Although Bayer did not admit liability, the United States alleged that 
Bayer: 1) knowingly set and reported AWPs for these drugs at levels far 
higher than the actual acquisition cost of the majority of its 
customers and caused those customers to receive excess Medicaid 
reimbursement, 2) made misrepresentations to the Medicaid programs of 
certain states, and 3) knowingly misreported and underpaid its Medicaid 
rebates for the drugs.
    TAP Pharmaceutical Products, Inc. In October of last year, the 
United States announced a major global health care fraud settlement 
with TAP Pharmaceutical Products Inc. (``TAP''). TAP agreed to pay a 
total of $875 million to resolve its liability, the largest health care 
fraud settlement ever. TAP also agreed to plead guilty to violating 
Federal law governing the use of drug samples. The investigation 
centered on TAP's sales and marketing efforts to physicians who used 
TAP's prostate cancer drug, Lupron. The company routinely provided free 
samples of Lupron to physicians, expecting that those physicians would 
bill the free samples to the patients and Medicare. TAP also allegedly 
paid kickbacks to physicians, HMOs, and others in the form of grants, 
debt forgiveness, travel, and entertainment, and other items to induce 
them to purchase Lupron. In addition, TAP allegedly set and reported 
AWPs for Lupron at levels far higher than the actual acquisition cost 
of the majority of its customers and caused those customers to receive 
excess reimbursement from Medicare and Medicaid. TAP also allegedly 
underpaid rebate amounts due to the states under the Medicaid Rebate 
Statute.
Conclusion
    A drug reimbursement system should be based on real prices 
available in the marketplace. Physicians and suppliers, including 
pharmacies, should be fairly reimbursed and at levels that ensure that 
the drugs are accessible. If reimbursement is set too low, some 
beneficiaries may not be able to obtain needed prescription drugs. We 
recognize that some physician groups have raised concerns about 
Medicare's attempts to lower reimbursement for prescription drugs. 
Specifically, 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.
    This concludes my testimony. I appreciate the opportunity to 
address this important issue with you today. I welcome your questions.
References:
Medicare Reimbursement of Prescription Drugs
OEI-03-00-00310 January 2001
http://oig.hhs.gov/oei/reports/oei-03-00-00310.pdf

Response to Request from The Honorable C.W. Tauzin
OEI-03-01-00490 June 2002 (Not on Internet)

Medicare Reimbursement of Albuterol
OEI-03-00-00311 June 2000
http://oig.hhs.gov/oei/reports/oei-03-00-00311.pdf

Excessive Medicare Reimbursement for Albuterol
OEI-03-01-00410 March 2002
http://oig.hhs.gov/oei/reports/oei-03-01-00410.pdf

Excessive Medicare Reimbursement for Ipratropium Bromide
OEI-03-01-00411 March 2002
http://oig.hhs.gov/oei/reports/oei-03-01-00411.pdf

Medicaid Pharmacy-Additional Analyses of the Actual Acquisition Cost of 
Prescription Drug Products
A-06-02-00041 September 2002
http://oig.hhs.gov/oas/reports/region6/60200041.pdf

Medicaid Pharmacy-Actual Acquisition Cost of the Generic Prescription 
Drug Products
A-06-01-00053 March 2002
http://oig.hhs.gov/oas/reports/region6/60100053.pdf

Medicaid Pharmacy-Actual Acquisition cost of Brand Name Prescription 
Drug Products
A-06-00-00023 August 2001
http://oig.hhs.gov/oas/reports/region6/60000023.pdf

                               

    Chairman JOHNSON. Thank you very much. Dr. Bunn?

    STATEMENT OF PAUL BUNN, M.D., DIRECTOR, CANCER CENTER, 
   UNIVERSITY OF COLORADO, DENVER, COLORADO, AND PRESIDENT, 
  AMERICAN SOCIETY OF CLINICAL ONCOLOGY, ALEXANDRIA, VIRGINIA

    Dr. BUNN. Chairman Johnson and distinguished Members of the 
Subcommittee, thank you for the chance to discuss with you the 
views of the American Society of Clinical Oncology, or ASCO, 
concerning payment for chemotherapy in physicians' offices. We 
also appreciate Mr. Stark's efforts to move the debate forward 
and that he has recognized the need to reform both the drug 
payments and the practice expense at the same time.
    With more than 19,000 Members, ASCO is the world's leading 
organization representing cancer physicians and researchers. I 
am the elected President of ASCO and serve as Director of the 
University of Colorado Cancer Center in Denver. My specialty as 
a medical oncologist is the care of patients with lung cancer.
    I would like to begin by summarizing several facts 
regarding cancer care in the United States. First, scientific 
evidence indicates that cancer mortality rates are declining in 
the United States. This decline can be attributed to advances 
in screening, early detection, prevention, and therapy. These 
advances have been realized largely through the Nation's 
investment in cancer research and Congressional support for the 
national cancer program.
    Second, the U.S. cancer care system is the best in the 
world. In this system, care is provided primarily in the 
outpatient office setting because it is preferred by patients 
who benefit from its convenience, its efficiency, and its 
quality. Academic cancer centers play a major role in 
scientific discovery and education, but are not equipped to 
provide chemotherapy services to the majority of cancer 
patients.
    Third, most cancer chemotherapies and supportive care 
agents are delivered most effectively in the office setting. 
This is possible because of improvements in chemotherapeutic 
drugs with fewer side effects, improved chemotherapy delivery 
systems, better medications for system management, and highly 
qualified support staff, including specially trained nurses, 
pharmacists, and other health professionals.
    Fourth, the reduction in cancer mortality and improved 
quality of care come with associated increases in cost. Most of 
these cost increases are due to increases in non-physician 
services, such as chemotherapy administration and other 
essential patient services.
    Fifth, Medicare more than adequately reimburses for the 
costs of drugs but under-reimburses for practice expenses. The 
ASCO has long believed that the current system of reimbursement 
is fundamentally flawed, but can only be fixed by reform in all 
parts of the system. The net result of such simultaneous 
changes would be to preserve the quality and integrity of 
cancer care in the country today.
    The ASCO is concerned that sudden changes in drug 
reimbursement without correction in practice expense payments 
could have a ripple effect that would adversely impact the 
quality of care for our patients. Academic centers such as my 
own could not absorb a significant influx of new patients from 
physician offices that might be unable to continue to provide 
chemotherapy services.
    With that background, I want to make it clear that both I 
personally and ASCO favor reform of the current system. Let me 
briefly set forth what is necessary.
    On the practice expense side, ASCO has advocated making 
direct estimates of the cost involved in furnishing cancer 
therapy. If Congress wants to use a system based on surveys of 
practice expenses per hour, we believe the following are 
required.
    First, CMS should take into account the new data derived 
from the recently completed Gallup survey to determine practice 
expenses per hour of physician work. The data indicate 
significant underpayment for these expenses.
    Second, CMS must eliminate from its payment methodology 
bias against services that do not involve physician work, these 
services being critical to oncology care.
    Third, Medicare must commit to pay in full for all actual 
costs incurred.
    On the issue of payment for drugs themselves, we have no 
strong preference among the methodologies under consideration. 
Competitive bidding sounds promising, but we have no idea of 
how it might play out in a practical manner, given the 
necessity to maintain inventories of drugs for both Medicare 
and non-Medicare patients. The overarching point with respect 
to payment for drugs, it is necessary to cover all the costs of 
making the drugs available to Medicare beneficiaries with 
cancer. This means we must account for the variability in the 
capacity of individual physicians to acquire drugs at the 
lowest possible price. Moreover, we have to accept, regardless 
of the underlying payment mechanism, that maintenance of an 
inventory of expensive, toxic, and sometimes unstable drugs 
bears its own costs and these should be reimbursed by Medicare.
    The ASCO is very eager to work with Congress and with CMS 
to reach a solution that will assure Medicare beneficiaries 
continue to receive the best possible cancer care.
    Thank you again for inviting me here today, and I am happy 
to answer your questions.
    [The prepared statement of Dr. Bunn follows:]
 Statement of Paul Bunn, M.D., Director, Cancer Center, University of 
Colorado, Denver, Colorado, and President, American Society of Clinical 
                     Oncology, Alexandria, Virginia
    Chairman Johnson and Members of the Subcommittee, thank you for the 
opportunity to appear before you to discuss a topic of great 
importance, not just to the physicians whom I represent, but also, more 
importantly, to the patients with cancer whom we treat. That issue is 
the means by which the Medicare program pays for cancer treatment 
services for our senior citizens. This has been a technically complex 
and difficult issue, but ASCO is committed to working with you towards 
an appropriate solution. What is at stake is the quality and 
accessibility of essential services for cancer patients.
    My name is Paul Bunn. I am a medical oncologist who specializes in 
the treatment of patients with lung cancer. I am Director of the Cancer 
Center at the University of Colorado and currently serve as President 
of the American Society of Clinical Oncology (ASCO).
    I want to thank you, Chairman Johnson, for your leadership not only 
on this issue but in quality cancer care generally. We recall your 
early and consistent support for Medicare coverage of patient care 
costs in clinical trials, leading up to the eventual National Coverage 
Decision in which Medicare agreed to extend such coverage in late 2000. 
And we are very grateful that you championed legislation to require the 
General Accounting Office (GAO) to conduct studies that would give 
critical answers to questions about the cost of providing cancer care 
in physician offices. As you indicated in your Advisory for this 
hearing, ``it will take congressional action to ensure that our seniors 
continue to have access to high-quality cancer care.'' We agree 
completely with that goal.
    Let me make clear at the outset that neither my income, nor the 
revenues of the Cancer Center that I head are influenced by the 
controversy involving reimbursement for office-based treatment that I 
understand to be the focus of the Subcommittee today. I am based at a 
Cancer Center that provides cancer treatment mostly in its outpatient 
department, therefore I do not anticipate that changes in the payment 
mechanism for drugs in physician offices will have any direct impact on 
me or on my institution. Moreover, my entire oncology career has been 
spent either at the National Cancer Institute or at an academic medical 
center, neither of which is directly affected by this reimbursement 
matter.

                   Necessity for Comprehensive Reform

    Nevertheless, I am quite concerned that sudden or sharp changes in 
reimbursement levels in any part of the comprehensive cancer care 
system in our country might have a ripple effect that could influence 
all other parts of the system and, in turn, all cancer patients. For 
example, in my own position at the Cancer Center, I know that we could 
not readily absorb a significant influx of new patients from physician 
office practices, nor could we continue to provide quality cancer care 
if our own drug reimbursement were reduced. Any reform must ensure that 
quality care remains accessible to the approximately 80% of cancer 
patients who receive chemotherapy in physician offices.
    With that background, I first want to make clear that both I 
personally and my organization ASCO favor reform of the current system. 
We do not relish being targets for those who correctly point out that 
some drugs are reimbursed by Medicare at a rate that exceeds the 
acquisition cost. It is particularly troublesome when one focuses on 
the fact that the drugs where such excess payments occur are not 
usually the new sole-source drugs that are the cornerstones of modern 
chemotherapy, but instead they are older multisource or generic drugs 
that are less important to cancer care but still useful and necessary 
in patient care. While physicians are targeted for harsh criticism when 
such drugs are overpaid by Medicare (and by beneficiaries through their 
copayments), we should recognize that it is the payment system itself, 
not wrongdoing by physicians, that perpetuates any overpayments.
    What can be done to fix that payment system? We believe, as we have 
previously testified before congressional committees, that reform must 
be comprehensive, encompassing both overpayments for drugs and 
underpayments for the costs of administering the drugs. In that regard, 
Chairman Johnson, we assume that you have signaled your agreement by 
crafting legislation in both the Balanced Budget Refinement Act of 1999 
and the Benefits Improvement and Protection Act of 2000 specifically 
requiring GAO to study shortcomings in Medicare practice expense 
payments.
    Unfortunately, the GAO consideration of these issues failed to get 
to the core issue of the cost of administering chemotherapy in the 
office setting and the chronic Medicare underpayment of those costs 
because GAO, contrary to the statutory instruction, conducted no 
``nationwide study'' and collected no new data regarding ``resources 
necessary to provide safe outpatient cancer therapy services and the 
appropriate payment rates for such services.''

                     Practice Expense Reimbursement

    Although the GAO failed to produce the most useful type of data, 
ASCO recently contracted with the Gallup Organization to conduct a 
survey of oncology practices in order to determine their practice 
expenses per hour of physician work. This survey employed the 
methodology of the American Medical Association SMS survey used by 
Medicare to set payment rates. Practice expenses per hour does not 
directly indicate the cost of furnishing any specific service, but it 
is a component of Medicare's methodology for setting payment rates.
    ASCO has long asserted that past survey results were inadequate to 
capture true costs of oncology practices because they included only a 
small, unrepresentative group of oncologists. Therefore, in order to 
address the paucity of data, ASCO engaged Gallup to conduct a new 
survey of oncology practices that would provide more reliable answers. 
Gallup has now completed its survey, and the resulting data were 
forwarded to the contractor of the Centers for Medicare & Medicaid 
Services (CMS) for evaluation. The CMS contractor, the Lewin Group, has 
completed its analysis of the data and forwarded its conclusions to 
CMS.
    As analyzed by Lewin, the survey data show that CMS dramatically 
underestimated oncologists' practice expenses per hour; the survey, 
adjusted for inflation, reflects that oncologists' actual practice 
expense is roughly 90% higher than CMS' current assumptions. Additional 
analysis, still underway, may increase the gap between actual expenses 
and what Medicare assumes to be the case.
    In view of the complexity of the CMS methodology for converting 
practice expenses per hour into actual payment amounts, we are 
uncertain how Medicare reimbursement will be affected by these new 
data. We are, however, hopeful that we will be able to work with CMS to 
determine whether the current methodology, after taking into account 
this important new information, will result in adequate payment 
amounts.
    Aside from consideration of the new data, we believe it is also 
necessary for CMS to revise its current methodology to eliminate its 
bias against services that do not involve physician work--a very 
substantial part of oncology services. Both GAO and the Lewin Group 
have independently concluded that the current CMS methodology is biased 
against zero physician work value services and thus leads inevitably to 
lower payment amounts for those services. In addition, once the 
methodology is revised to result in an accurate determination of the 
costs involved, Medicare must actually pay these costs in full.
    With the availability of new data to support the longstanding 
assertion of oncologists that their practice expenses are under-
reimbursed, and hopefully with the willingness of CMS to eliminate its 
bias against certain categories of services, the time may be ripe for 
comprehensive revision of Medicare payment for cancer care in physician 
offices. ASCO looks forward to working with CMS and the Congress to 
find the right resolution of an enduring debate over appropriate 
payment levels for these services.

                           Drug Reimbursement

    Assuming meaningful practice expense reforms can be implemented, it 
is essential also to change the way in which drugs are reimbursed by 
Medicare. Our preferred approach would be to conduct market surveys in 
an effort to identify true market costs. Through such a mechanism, the 
system could eliminate the large disparities between Medicare payments 
and acquisition costs that occur when generic or other competition 
drives the price down over time while the Medicare payment remains 
fixed.
    I am aware that the Ways & Means Committee has developed a general 
concept of competitive bidding for purchase of drugs. Personally, I am 
in favor of a competition-based approach to just about any business 
endeavor, but I must admit I have questions about the practical 
applications of competitive bidding in this context.
    Those questions largely revolve around the fact that physicians, or 
clinics, or hospitals or anyone purchasing cancer drugs, will most 
likely be purchasing for both Medicare and non-Medicare patients. It 
would be extremely difficult, if not impossible, for providers to 
segregate Medicare drugs from those purchased outside the system, 
presumably through the normal market mechanisms.
    The implications of an overarching drug purchasing authority that 
might eventually exert influence on private as well as public purchases 
have to be resolved by high-level policymakers. Because we have serious 
reservations about the underlying concept, we would like to focus on 
the elements that we think should be incorporated into a reimbursement 
system for drug purchases that would be an alternative to the current 
average wholesale price (AWP) approach.
    Perhaps most importantly, we must recognize the tremendous 
variation in ability of different purchasers to obtain volume- or 
other-discounts. Any fixed payment, whether derived through competitive 
bidding or otherwise, should allow for the fact that small market 
purchasers may be unable to obtain the designated price.
    It is also important to recognize that maintenance of an inventory 
of expensive and toxic chemotherapy drugs has its own attendant costs. 
These costs include spillage, wastage, the opportunity cost of 
investment in an expensive drug inventory, and unpaid patient 
coinsurance, or bad debt. In some states, sales or other locally 
imposed taxes must be covered.
    The general principle that should be applied with respect to drug 
reimbursement is that Medicare payment should cover the full and actual 
costs of acquiring and maintaining the drugs in preparation for 
treatment of cancer patients. Drugs should not be a profit center for 
physicians, but neither should they suffer loss as a result of 
maintaining a drug inventory for the benefit of cancer patients. With 
your help, I am certain that we will be able to develop a system that 
satisfies these simple requirements.

                   Maintenance of Quality Cancer Care

    The preeminent concern for all of us should be maintenance of 
quality care for beneficiaries with cancer. Over the course of the past 
several decades, there has been a revolution in the ability to deliver 
life-saving cancer care to patients. Once life-threatening toxicities 
of chemotherapy can now be managed, and newer therapies are more 
targeted and feature fewer and less serious side-effects. These 
advances, however, do not come without their costs.
    Many of the practical advances in cancer care are now realized in 
the physician office setting, often far from urban or academic medical 
centers. Science has made this technology transfer possible, but it is 
not impervious to being undermined if financial support is withdrawn. 
Patient advocates in the cancer community feel strongly that any 
solution to this problem should maintain the current quality care for 
cancer patients.
    Cancer patients now fare much better than just a few years ago. 
Tremendous progress in cancer treatment has made it possible for cancer 
patients to experience the same quality of care whether it is in a 
community doctor's office or a hospital department. Quality care, 
however, can be placed in jeopardy if payment for services is 
precipitately reduced, regardless of the treatment setting.
    I urge you and your Subcommittee Members to consider carefully the 
potential impact of any changes in payment for cancer chemotherapy 
drugs or services, and take those considerations into account before 
pursuing any legislative action.

                               

    Chairman JOHNSON. Thank you very much, Dr. Bunn. Dr. 
O'Grady?

    STATEMENT OF MICHAEL J. O'GRADY, PH.D., SENIOR RESEARCH 
           DIRECTOR, PROJECT HOPE, BETHESDA, MARYLAND

    Dr. O'GRADY. Madam Chairwoman, Members of the Subcommittee, 
my name is Michael O'Grady, and I am a Senior Research Director 
at Project HOPE. I appreciate the opportunity to comment today 
on how Medicare's payments for currently covered drugs might be 
improved.
    I would like to start with three key points. One has been 
pointed out before. The current system is overpaying for the 
drugs Medicare covers.
    Two, the evidence is in from the CMS competitive bidding 
demonstrations and other public and private insurers that 
competitive purchasing of drugs can yield significant savings 
without hurting quality or beneficiary access.
    Third, a reformed payment system based on competition 
between drug manufacturers for access to the Medicare market 
and competition between pharmaceutical benefits managers (PBM) 
or other group purchasers to have the opportunity to be 
Medicare's purchasing agent has the opportunity to provide the 
highest quality drugs at the most competitive price.
    Some background on the problem. Certainly, basing payments 
on average wholesale price has long been a problem and it is 
well demonstrated by both the OIG reports and the GAO reports 
on this issue. As a general rule, any payment formula that 
relies on data that cannot be effectively verified, either 
through audits or other means, always will leave itself 
vulnerable to that sort of manipulation.
    The AWP-based formula is a prime example of how hard it is 
to get an administered price done correctly. Every year, CMS 
tries to accurately estimate thousands of different prices 
across thousands of different counties across America using, at 
best, 2-year-old data. This almost Herculean task is almost 
impossible to do accurately.
    Now, how to correct the problem. Unlike most problems in 
Medicare payment policy, there is an example of how this might 
be solved. The evidence from the CMS competitive bidding 
demonstrations is quite encouraging. In the example brought up 
before by Mr. Scully, in San Antonio competitive bidding saved 
Medicare 25 percent over what it would have paid for the drug 
Albuterol. There were no discernable effects on beneficiary 
access found by the evaluation team that came in afterward. 
Outside of Medicare, both public and private insurers have made 
heavy use of pharmaceutical benefit managers, PBMs, to help 
negotiate discounts and managed benefits.
    Some considerations in thinking about how to design a new 
system. An essential design consideration is getting the 
incentives right. Use the competitive natures of the industries 
involved to maximize Medicare's goals, design a payment system 
so drug manufacturers, suppliers, and providers will be most 
successful in the new system by providing the highest quality 
products at the most competitive prices.
    There are two areas where competition can be used to 
encourage more prudent purchasing. First would be competition 
among drug manufacturers for access to the Medicare market. The 
second would be competition among group purchasers, for 
example, PBMs, to supply drugs to Medicare's providers.
    Now, this type of competition for access to the market. The 
largest example that is currently out there is used by the 
State of California for CalPERS, the California Public 
Employees Health Plan. The CalPERS takes bids from a number of 
different health plans every year with the understanding that 
not all health plans will necessarily be allowed to offer 
coverage to the approximately 1 million State and municipal 
employees and retirees. The result has been an active 
competition between California health plans to offer the most 
coverage at the lowest price.
    Medicare could apply the same method by designing a payment 
system that has drug manufacturers compete for access to the 
Medicare market. Medicare could use PBMs or other group 
purchasing organizations the same way employers do, to 
negotiate with the drug manufacturers for group discounts.
    Now, the other type of competition that might work has to 
do with competition to supply Medicare's providers. A familiar 
example of this type of competition is found with the Federal 
Employees' Health Benefits Plan, or FEHBP, where insurers 
compete with one another to enroll workers and retirees in 
their particular plan. The government sets its contribution 
based on an average premium bid by the insurers. Then the 
workers and retirees shop between plans for the best plan at 
the most affordable price.
    A similar design could be used where PBMs and other group 
purchasers compete to offer Medicare-covered drugs to 
Medicare's providers. This could be done by having PBMs bid to 
participate in a program based on discounts they already have 
or believe they can get from the manufacturers. The government 
payment to providers could be set at an average price for a 
particular drug. Providers would have the ability to shop 
between different suppliers and choose one they were happiest 
with in terms of price and service.
    Now, to conclude, the best chance of maximizing quality and 
access while minimizing Medicare's expenditures lies in 
designing a purchasing system that builds on competition 
between both manufacturers and PBMs. By structuring the 
competition at two levels and having group purchasers act as 
the intermediaries, the link between the drug manufacturers and 
the providers that has caused so much trouble in the past has 
been effectively broken.
    How the competition is structured is key to the success of 
a new program. The incentives of all actors, manufacturers, 
PBMs, and providers, have to be structured in the same 
direction. They only gain by providing quality products and 
service at the best possible price. Thank you very much.
    [The prepared statement of Dr. O'Grady follows:]
   Statement of Michael J. O'Grady, Ph.D., Senior Research Director, 
                    Project HOPE, Bethesda, Maryland
    Madam Chairwoman and Members of the Subcommittee, my name is 
Michael J. O'Grady and I am a Senior Research Director at Project HOPE. 
Previously I have served on the professional staff of the Senate 
Finance Committee, The Bipartisan Commission for the Future of 
Medicare, The Medicare Payment Advisory Commission and The 
Congressional Research Service. In those various roles I have had a 
chance to extensively study the Medicare program and a number of 
different health insurance programs, including the Federal Employees 
Health Benefits Program (FEHBP), the California Public Employees 
Retirement System (CalPERS) and private sector employer-provided health 
insurance programs. I appreciate the opportunity to comment today on 
the how Medicare's payments for currently covered drugs might be 
improved.
Three Key points:
        1) The current payment system is overpaying for the drugs 
        Medicare covers.
        2) LThe evidence is in from the CMS competitive bidding 
        demonstrations and other insurers that a competitive purchasing 
        of drugs can yield significant savings, without hurting quality 
        or beneficiary access.
        3) LA reformed payment system based on competition between drug 
        manufacturers for access to the Medicare market and competition 
        between PBMs to be Medicare's purchasing agent has the 
        opportunity to provide the highest quality drugs at the most 
        competitive price.
Background:
    The Problem: A basing payment on the average wholesale price (AWP) 
has long been a problem. The overpayments associated with the formula 
are well documented by the Office of the Inspector General (OIG) and 
the General Accounting Office (GAO).\1\ The vulnerability of the 
current AWP-based payment formula to gaming by manufacturers has 
resulted in significant overpayments by Medicare. Figure 1 provides an 
example of the problem with the AWP-based formula. As a general rule, 
any payment formula that relies on data that cannot be effectively 
verified, through audits or other means, leaves itself vulnerable to 
manipulation.
---------------------------------------------------------------------------
    \1\ Medicare Payments for Covered Outpatient Drugs Exceed 
Providers' Cost. Report to Congressional Committees United States 
General Accounting Office, GAO-01-1118, September 2001.




[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]






    Source: ``Average Wholesale Price for Prescription Drugs: Is There 
a More Appropriate Pricing Mechanism?'' Dawn M. Gencarelli, National 
Health Policy Forum, NHPF Issue Brief No. 775/June 7, 2002, based on 
information from U.S. General Accounting Office, Medicare: Payments for 
Covered Outpatient Drugs Exceed Providers' Cost, September 2001 (GAO-
---------------------------------------------------------------------------
01-1118), Washington, D.C.

    The AWP-based formula is a prime example of how hard it is to get 
administered prices right. Every year CMS tries to accurately estimate 
thousands of different prices in thousands of different counties. This 
almost Herculean task is very hard to do accurately.
    How to Correct the Problem: Unlike most problems with Medicare 
payment policy, this problem has a relatively straightforward solution. 
The evidence from the CMS competitive bidding demonstrations is in and 
the results are encouraging. CMS conducted successful durable medical 
equipment demonstrations projects in Florida and Texas. In the San 
Antonio competitive bidding demonstration, pharmacy suppliers were 
asked to bid for Albuterol, a drug used for respiratory illnesses with 
a nebulizer. Medicare saved an estimated 25 percent over what it would 
have paid without competitive bidding and there were no discernable 
effects on beneficiary access (see Table 1).\2\
---------------------------------------------------------------------------
    \2\ ``Second Annual Report to Congress: Evaluation of Medicare's 
Competitive Bidding Demonstration For Durable Medical Equipment, 
Prosthetics, Orthotics, and Supplies.'' U.S. Department of Health and 
Human Services, Centers for Medicare & Medicaid Services, Baltimore, 
Maryland, September 2002. http://www.cms.gov/healthplans/research/
dmebid.asp

  Table 1: Average Price Reduction and Estimated Percent Savings, Polk County, Florida, and San Antonio, Texas:
                                          Final Period in Each Site \3\
----------------------------------------------------------------------------------------------------------------
                                              Polk County, Florida                   San Antonio, Texas
                                     ---------------------------------------------------------------------------
          DMEPOS    Category                             Estimated Percent                     Estimated Percent
                                         Average Price      Savings, Oct.      Average Price      Savings, Feb.
                                        reduction (%)     01--  Sept. 02**    reduction (%)    02--  Dec. 02* **
----------------------------------------------------------------------------------------------------------------
Oxygen Equipment and Supplies.......          19.4               19.4               21.8               17.7
Hospital Beds & Accessories.........          34.1               33.2               25.7               27.6
Urological Supplies.................           7.4                6.8                N/A                N/A
Surgical Dressings..................           3.8                3.6                N/A                N/A
Wheelchairs & Accessories...........           N/A                N/A               20.1               23.8
General Orthotics...................           N/A                N/A                9.5               20.3
Nebulizer Drugs (Albuterol).........           N/A                N/A               21.4               25.3
----------------------------------------------------------------------------------------------------------------
* Final period of the San Antonio demonstration is less than 1 year.
** Estimate of percent savings assumes 1999 volume for Polk and 1998 volume for San Antonio.
Notes: (1) The average price reduction indicates the average price decline when comparing the demonstration
  prices to the prices on the statewide fee schedule for 2001. The percent differs between the average price
  reduction and the savings because the two calculations use slightly different volume weights. (2) Detailed
  data comparing round one and round two prices in Polk County can be found in the Appendix, Chapter 2, Section
  2.2.2.

    Outside of Medicare, public and private insurers have made heavy 
use of pharmaceutical benefit managers (PBMs) to help negotiate 
discounts and manage benefits. A recent study found that that PBMs 
managed 71 percent of insured purchases at retail drug stores in 
1999.\4\ The success of PBMs in the Medicare program will depend on the 
structure and incentives the program provides. A study by the Kaiser 
Family Foundation found the potential for PBM's to provide a cost-
effective Medicare drug benefit were significant, if structured 
properly.\5\
---------------------------------------------------------------------------
    \3\ Op. cit., footnote #3, page 4.
    \4\ ``The Role Of PBMs In Managing Drug Costs: Implications For A 
Medicare Drug Benefit,'' Prepared by: Anna Cook, Ph.D., Thomas 
Kornfield, M.P.P., Marsha Gold, Sc.D., Mathematica Policy Research, 
Inc.
    Prepared for: The Henry J. Kaiser Family Foundation, January 2000, 
page 7.
    \5\ Ibid. page xi.
---------------------------------------------------------------------------
    For Medicare to ignore the effective tools used by all other major 
insurers, both private and public, is inefficient at best and 
irresponsible at worst.
    As the deliberations on a possible outpatient drug benefit 
continue. A smarter, more efficient and more flexible CMS is a 
necessary starting point. CMS has to move up the learning curve on the 
smartest, most efficient ways to purchase pharmaceuticals.
What are the essential goals in redesiging Medicare's drug 
        reimbursement?
    1) LEnsure beneficiary quality and access, while being as prudent a 
purchaser as possible.

        The Medicare program has a responsibility to the beneficiaries 
        to provide high quality health care. The Medicare program also 
        has a responsibility to the taxpayers' to be as careful as 
        possible with their tax money. Indirectly the Medicare program 
        has a responsibility to providers. Like any other insurer, if 
        Medicare treats providers unfairly and pays them less than the 
        cost of providing care, underpayments will eventually result in 
        reduced quality and access for beneficiaries. Paying providers 
        fairly does not mean overpaying providers. Given the dangers to 
        Medicare's financial viability associated with the approaching 
        retirement of the baby boom generation, Medicare must negotiate 
        for the most competitive prices possible and take full 
        advantage of the government's considerable buying power.

    2) Ensure flexibility and adaptability to change:

        If there is any certainty in this policy area, it that things 
        will be in almost constant change. Any payment policy that is 
        not flexible enough to adapt to those changes runs the risk of 
        overpaying for some drugs, underpaying for others and possibly 
        denying Medicare beneficiaries access to the latest 
        breakthroughs.
        Technological change affects payment policy in two key ways: 1) 
        New products are constantly becoming available and 2) The price 
        of established products may change significantly over time.
        Whether to cover a particular drug is a decision made 
        separately within CMS. However, setting the payment is part of 
        the payment methodology and critical in determining how 
        available the drug will be to beneficiaries. In the case of 
        new, breakthrough drugs still under patent, no insurer is in a 
        very strong negotiating position. But even patented drugs find 
        themselves in competition with other patented drugs developed 
        by other manufacturers. Given the serious competition between 
        drug manufacturers there are opportunities for negotiation. The 
        alternative method of setting a fixed government rate is in 
        effect a ``take or leave it'' situation, without the 
        flexibility to adapt quickly to an evolving situation.
        Over time the price for a particular drug may change 
        significantly and a well-designed payment methodology will take 
        these changes into account. The clearest example is when a drug 
        comes off patent and generic alternatives become available. 
        But, even while still patented, the price can change 
        significantly and usually in a downward direction. There are 
        economies of scale and competition for other patented drugs 
        that reduce the price of a drug.
        The opposite can be true as well. One of the more interesting 
        results of the CMS competitive bidding demonstrations was that 
        while most prices came down well below the traditional CMS rate 
        schedule, this was not universally true. There were some 
        products were prices had risen and the CMS administered price 
        was well below the negotiated price. Perhaps the suppliers were 
        not the effective negotiators they had been on the other 
        products, or perhaps the administered price was too low. To 
        repeat an earlier point, trying to set an appropriate price 
        without negotiation is extremely difficult. In the case of Part 
        B covered drugs the evidence points to significant overpayment, 
        but the opposite is also true. It is just very hard to 
        accurately set thousands of prices in thousands of different 
        counties. The potential for both overpayment and underpayment 
        is high.
How to achieve these goals?
    How can Medicare develop a payment method that will achieve these 
goals? An essential design consideration is getting the incentives 
right. Use the competitive nature of the industries involved to 
maximize Medicare's goals. Design the payment system, so drug 
manufacturers, suppliers and providers will be the most successful by 
providing the high quality products at the most competitive prices.
    There are two areas where competition can be used to encourage more 
prudent purchasing:

        1) LCompetition among drug manufacturers for access to the 
        Medicare market.
        2) LCompetition among group purchasers, e.g., PBMs, to supply 
        the drugs to providers.

    Competition for access to the market_The California Public 
Employees Retirement System (CalPERS) is an example of an insurer using 
competition for access to help control spending. Due to effective union 
contract negotiations by the California state employees unions, the 
state contribution towards an employee's health insurance was generous, 
sometimes more than 100 percent of premium costs. Without some 
effective method to negotiate, the health plans would have no incentive 
to ever bid below the state contribution. Offsetting this disincentive, 
CalPERS has taken bids from a number of different health care plans, 
with the understanding that not all plans would necessarily be allowed 
to offer coverage to the approximately one million state and municipal 
employees. The result has been active competition between California 
health plans to offer the most coverage at the lowest price and 
premiums below the level of the state contribution.
    Medicare could apply the same method by designing a payment system 
that has drug manufacturers compete for access to the Medicare market. 
This could be done using PBMs or other group purchasing organizations. 
PBMs currently negotiate savings with manufacturers based on their 
ability to purchase in volume. The PBMs represent a collection of 
groups, typically employers, who allow the PBMs to negotiate for them. 
Failure to reach a successful negotiation with the PBM results in the 
manufacturers drug not being covered or covered at a higher beneficiary 
copay. Medicare can use PBMs or other group purchasing organizations 
the same way employers do, to negotiate with the drug manufacturers for 
group discounts.
    Competition to supply providers_A familiar example of this style of 
competition is the Federal Employees Health Benefits Program (FEHBP). 
Insurers compete with one another to enroll workers and retirees in 
their plans. The government contribution is fixed as a percentage of 
the weighted average premiums bid by the insurers, which means insurers 
with higher bids are more expensive to the workers and retirees. 
Premium cost growth is slowed as workers and retirees shop between the 
plans for the best plan at the most affordable price.
    A similar design could be used where PBMs and other group 
purchasers compete to offer Medicare covered drugs to Medicare 
providers. This could be done by having the PBMs bid to participate in 
the program based on the discounts they already have, or believe the 
can get, from drug manufacturers. If there were a number of PBMs or 
group purchasers negotiating to supply Medicare covered drugs; 
providers would have the ability to shop between the different 
suppliers for the best price and service.
    The government payment to providers could be set to the average 
price of the drug. The providers would have the ability to choose among 
the multiple PBMs for the most competitive price and the best service. 
By setting the payment to the average price of the drug, the provider 
is assured that there are PBMs offering the drug at that price, but the 
provider incentives are to shop for lower cost PBMs within the system.
Concluding remarks:
    The best chance of maximizing quality and access, while minimizing 
Medicare expenditures lies in designing a purchasing system that builds 
on competition between both manufacturers and PBMs.
    By structuring the competition at two levels and having PBMs and 
other group purchasers act as intermediaries, the link between drug 
manufacturer and the providers is effectively broken.
    How the competition is structured is key to the success of the 
program. The incentives of all actors, manufacturers, PBMs and 
providers, have to structured in the same direction--they only gain by 
providing quality products and service at the best possible price.

                               

    Chairman JOHNSON. Thank you, Dr. O'Grady. Mr. Jones?

     STATEMENT OF JOHN D. JONES, VICE PRESIDENT, LEGAL AND 
    REGULATORY AFFAIRS, PRESCRIPTION SOLUTIONS, COSTA MESA, 
    CALIFORNIA, ON BEHALF OF PACIFICARE HEALTH SYSTEMS, INC.

    Mr. JONES. Chairman Johnson, Representative Stark, and 
Members of the Subcommittee, I want to thank you very much for 
this opportunity to testify. I am John Jones, Vice President of 
Legal and Regulatory Affairs for Prescription Solutions, which 
is a subsidiary of PacifiCare Health Systems. I am a pharmacist 
by training.
    Prescription Solutions is a pharmacy benefit management 
company which manages $2 billion of prescription drugs 
annually. We handle about 200,000 claims every day. Nearly 
15,000 of those claims are filled through our mail service 
facility.
    We support efforts that promote competition in the market 
for Medicare-covered drugs. We applaud the Subcommittee's work 
on the House-passed Medicare prescription drug bill which seeks 
to accomplish this. My goal today is to describe how 
PacifiCare, as a private payer, uses competition-based tools to 
provide beneficiaries with prescription drugs in a cost-
effective manner. I then will illustrate how using these 
purchasing and quality management techniques can result in 
better clinical outcomes. Finally, I will highlight how price 
setting mechanisms can disrupt this model and create barriers 
to cost-effective drug pricing.
    For years, the drug delivery system was fragmented and 
lacked a cohesive infrastructure that could effectively monitor 
utilization, ensure appropriate use, and maximize efficiencies. 
Spurred by recent increases in utilization and cost of part B 
covered drugs, Prescription Solutions developed a better model 
that uses a series of management tools. These include the 
following: a highly automated mail service pharmacy, specialty 
pharmacies dealing with AIDS and transplant, home infusion 
management, close coordination with infusion centers, and 
obtaining drugs through wholesalers and manufacturers at 
discounted prices.
    The mix of tools we use can be influenced by the 
reimbursement model for a particular provider group. Three 
basic models are used. First, the provider group assumes the 
risk for outpatient drugs. Second, the health plan assumes the 
risk and pays the pharmacy claims to the provider. Third, the 
PBM supplies the drugs and bills the health plan or insurer.
    Using these techniques, we are able to achieve efficiencies 
that have allowed us to pass many of those savings on to our 
Members in the form of more comprehensive benefits. However, 
this is becoming more challenging in the Medicare+Choice 
program.
    One important component of Prescription Solutions' model is 
that we integrate the need to manage the purchasing and cost of 
part B covered drugs with the need to produce the best overall 
health outcomes. For example, a use of formularies actually 
serves to improve the quality of care. Contrary to the 
conventional belief that formularies exist simply to control 
the cost of drug therapy, there are many aspects as to the 
proper administration of a formulary that have more to do with 
quality and clinical effectiveness.
    In one instance, we received a request for a non-formulary 
antibiotic medication, which is Vancomycin oral. The treating 
physician had prescribed this drug for a serious knee 
infection. Due to the way this medication works, by being taken 
orally, it cannot get into the blood stream in a high enough 
concentration to effectively treat the infection. We contacted 
the physician to change the medication to an intravenous form, 
notwithstanding the fact that the intravenous drug was 
significantly more costly than the oral medication. The oral 
form would have had no benefit and potentially would have led 
to a more serious problem, including a need for surgery.
    Prescription Solutions agrees that the current AWP system 
for determining payment for covered drugs is flawed in that it 
does not reflect the prices paid by suppliers and physicians. 
To us, AWP is simply a benchmark price that is independently 
established and maintained. It is useful as a tool. 
Increasingly, contracts with pharmaceutical manufacturers and 
pharmacy providers are based upon negotiated discounts from 
AWP.
    The AWP concerns are not the whole story. We would 
encourage the Subcommittee to understand the impact of another 
drug pricing rule which has brought impact in the 
pharmaceutical market as a whole, and that is the Medicaid best 
price rule. In simplest terms, the best price rule requires a 
drug company to give the State Medicaid programs the deepest 
discounts that it gives to the other purchasers. Manufacturers 
use the requirement as a shield against aggressive negotiations 
by private sector companies such as ours. The net effect is to 
artificially increase the price to all purchasers. Thus, the 
rule limits the effect that competition can have on price. It 
results in the States paying a higher price for drugs. In 
effect, while the best price rule was intended to reduce costs, 
it has become a good example of price controls failing to 
achieve the original purpose and raising drug prices for all 
consumers.
    In closing, we would commend the Committee for seeking 
solutions to the payment issues created under the AWP 
reimbursement system. We believe that Prescription Solutions' 
model, a closely integrated component of a health plan delivery 
system, is a template for how drug coverage and quality 
management can provide value to beneficiaries and decrease the 
overall cost of health care. Thank you very much.
    [The prepared statement of Mr. Jones follows:]
   Statement of John D. Jones, Vice President, Legal and Regulatory 
 Affairs, Prescription Solutions, Costa Mesa, California, on behalf of 
                    PacifiCare Health Systems, Inc.
INTRODUCTION

    Madam Chairman, Representative Stark, and Members of the 
Subcommittee, thank you very much for the opportunity to testify at the 
hearing on the payment of prescription drugs currently covered by 
Medicare. I am John Jones, Vice President of Legal and Regulatory 
Affairs for Prescription Solutions, which is based in Costa Mesa, 
California.
BACKGROUND

    Prescription Solutions, a pharmacy benefits management (PBM) 
company, was founded in 1993 as a subsidiary of PacifiCare Health 
Systems, Inc. (PHS). Prescription Solutions serves approximately six 
million individuals, including members of managed care organizations, 
and union trusts, retirees, third-party administrators, and employer 
groups. Our goal is to provide the highest quality drug coverage in a 
cost-effective manner. Access and affordability are the cornerstones of 
everything we do. Our company manages approximately $2 billion of 
prescription drugs annually. We handle approximately 200,000 
prescription claims per day of which nearly 15,000 are filled through 
our mail-service facility in Carlsbad, California.
    Our parent company, PHS, is one of the nation's largest health care 
services companies. Primary operations include managed care and 
indemnity products for employer groups and Medicare beneficiaries in 
eight states and Guam serving 4 million members. Approximately 800,000 
of these members are in our Medicare+Choice health plan, Secure 
Horizons. PHS and Prescription Solutions strive to provide a high 
quality, cost-effective pharmacy benefit for both our commercial 
members and Medicare beneficiaries.
    Our testimony today focuses on three points: We support efforts 
that promote competition in the market for Medicare-covered 
pharmaceuticals and to describe for the Subcommittee how PacifiCare, as 
a private payer, uses several processes to cover prescription drugs 
that are currently covered by Medicare in a cost-effective manner. 
Second, we believe that bringing appropriate purchasing and quality 
management techniques into the program can result in better clinical 
outcomes. And third, how price-setting mechanisms create barriers to 
cost effective drug pricing and contracting for care.

            Competition and Prescription Solutions Processes

    The key to Prescription Solutions' ability to operate efficiently 
is that it is a PBM, which was founded to support the drug coverage 
provided to the enrollees of health plan products provided by PHS. As 
such the ability to integrate managed care concepts with effective 
purchasing is worth review as Congress considers improving payment for 
Medicare-covered services. Since we believe that competition is key to 
our success, our testimony will describe some of the techniques we 
employ.
    As outlined in greater detail below, we utilize a variety of 
dynamic methods to manage our business in order to achieve efficiencies 
that permit us to provide a broader overall prescription benefit than 
the company might otherwise offer in the absence of those efforts. 
Nonetheless, over the past two or three years, these efficiencies have 
been more challenging to achieve for drugs that Medicare does not 
cover. In response to these market pressures, Prescription Solutions 
continues to strive to improve quality, safety, and cost management 
techniques. As referenced in various studies by the GAO and other 
public policy experts, the effect of various price setting mechanisms 
(i.e. Medicaid Best Price) on the market have not achieved the expected 
goal of reducing overall program costs.
    Recent cost increases and breakthrough biotechnology therapies have 
spurred new efforts to develop and implement coordinated processes to 
manage costs and improve health outcomes. Until recently, PHS risk or 
financial responsibility for these products had been delegated to 
medical groups and hospitals through capitated arrangements. Those 
entities in turn shifted accountability to home health, durable medical 
equipment, infusion centers and other providers. The result was a lack 
of a cohesive infrastructure that can effectively monitor utilization, 
ensure appropriate use and maximize efficiencies, thereby minimizing 
costs and encouraging providers to accept risk for the provision of 
those services.
    Recently, the utilization of Part B covered drugs has soared due to 
both technological advances in oncology and biotechnology. At the same 
time, the costs of these agents also have soared; supplying providers 
and patients in a convenient and cost effective manner has become 
difficult. More seriously, the delivery system for medications has 
become fragmented. Since many firms focus on providing a specific 
category of agents or a limited range of products and services, 
providers have had to work with many different entities creating 
further inefficiencies and less focus on quality of care.
    In response to this situation, Prescription Solutions strives for 
comprehensive solutions that create preferred product choices and 
clinical management. Prescription Solutions does not rely on any one 
technique to purchase and provide Medicare-covered drugs, but rather on 
a combination of tools. Dependent on the type of pharmaceutical or 
treatment, our programs can integrate some or all of the following 
processes:

         Mail Service Pharmacy. Prescription Solutions 
        operates a highly automated pharmacy that ships prescriptions 
        and over-the-counter drugs by mail. Mail service is most 
        routinely used to supply maintenance medication to patients on 
        long-term therapies. For complex treatment protocols, our PBM 
        will coordinate with the clinician, product and DME vendor, and 
        medical management to mail overnight the drugs and equipment 
        necessary to provide the drug. This eliminates the need for the 
        physician to coordinate with several vendors.
         Specialty Pharmacies. The PBM will coordinate with 
        pharmacies that provide niche therapy products by mail. 
        Examples of such therapies would be drugs for the treatment of 
        AIDS, transplants or infertility.
         Home Infusion. The PBM will assure that companies 
        which provide injectable medication that will be administered 
        in the patient's home is delivered with the proper equipment by 
        mail or a local delivery service.
         Infusion Centers. Prescription Solutions will work 
        with the organizations that provide injectable medications in a 
        clinical setting. Typically, patients go to such centers for 
        cancer treatments.
         Wholesaler/GPO. In this instance, the PBM obtains the 
        drug through large purchasing groups at discounted rates. This 
        purchasing price helps determine the reimbursement rates.
         Reimbursement Methods. There are three basic models. 
        In the first, provider groups assume the risk for all in-office 
        furnished pharmaceuticals. Dependent on the market, this model 
        applies to less than 50 percent of the providers. In a second 
        model, the health plan assumes the risk and the physicians send 
        claims for covered pharmacy services to the health plan; claims 
        are paid on a schedule of billed charges or on a discount off 
        AWP. Finally, the PBM may supply the drugs on order or 
        supplements inventory, and Prescription Solutions bills the 
        health plan or insurer. In this instance, the provider does not 
        have to negotiate pricing with multiple vendors. Between 30 to 
        40 percent of our PBM business falls into this model.

    Because Prescription Solutions is able to compete by leveraging the 
numbers of subscribers, contracted networks, and pharmacy arrangements, 
we can achieve efficiencies that, when integrated with the rest of the 
PHS health care and disease management services, have allowed us to 
pass many of those savings on to our members in the form of more 
comprehensive benefits. However, as is well known, this is becoming 
more challenging in the Medicare+Choice program.

                       Improved Clinical Outcomes

    One important outcome of Prescription Solutions ability to compete 
efficiently for cost-effective drugs is that we integrate the need to 
manage the purchasing and cost of Part B covered drugs with the need to 
produce the best overall health outcomes while managing total health 
costs. For this reason, many physicians from our contracted groups have 
stated that they can deliver better quality of care in a managed 
environment than in fee-for-service.
    I would like to illustrate the point with a couple of examples. We 
offer an integrated approach to management of specific diseases that 
involve physicians, pharmacists, and patients. We improve quality of 
care and quality of life. These programs often encourage the use of 
medication and can sometimes increase the cost of pharmaceutical care, 
but these costs often are offset by a decrease in the cost of overall 
health care. For example, the use of beta-blockers after a first heart 
attack is strongly supported by the research and national guidelines to 
help avoid future adverse cardiovascular events. The national average 
for the use of beta-blockers is only about 70 percent; our program has 
demonstrated 85 to 95 percent compliance with the guidelines. 
Prescription Solutions actively supports other disease management 
programs, such as those for diabetes and congestive heart failure. We 
work closely with patients and their physicians on the use of the most 
efficacious drugs.
    A second example illustrates our use of formularies as quality 
enhancement tools. By our definition, a drug formulary or preferred 
drug list is a compilation of drugs that have been reviewed for safety 
and efficacy. Contrary to the conventional belief that formularies 
exist to simply control the costs of drug therapy, there are many 
aspects to the proper administration of a formulary that have more to 
do with quality and clinical effectiveness. In one of our cases, a 
request for a non-formulary antibiotic medication, Vancomycin oral, was 
received in the prior authorization department. The treating physician 
had prescribed this drug for a serious knee infection. Due to the way 
this oral medication works, it could not get into the blood stream in a 
high enough concentration to effectively treat the infection. We 
contacted the physician to change the medication to an intravenous 
form. Notwithstanding the fact that the intravenous drug was 
significantly more costly than the oral medication, the latter would 
have had no benefit and potentially could have led to a more serious 
problem, including the need for surgery.

                Concerns With Current Pricing Mechanisms

    Finally, Prescription Solutions agrees with Members of Congress 
that the current AWP system for determining payment for covered drugs 
is flawed in that average prices and prices charged by wholesalers do 
not reflect the prices paid by suppliers and physicians. In fact, the 
tension that the AWP system has created led to changes in how health 
plans, like PHS, contract with certain specialists for Medicare-covered 
drugs, as we described earlier. To us, the AWP is simply a benchmark 
price that is independently established and maintained. We use it as a 
value used to negotiate purchasing, discounts and rebates of drugs. 
Increasingly, contracts with pharmaceutical manufacturers, pharmacy 
providers, and clients using our services are based upon negotiated 
discounts from AWP for the prescriptions being dispensed.
    But AWP concerns are not the whole story, and we would encourage 
the Subcommittee to understand the impact of a rule on drug costs to 
the Medicaid program, and which has broad impact in the pharmaceutical 
market as a whole, i.e., the Medicaid ``best price'' rule. In the 
simplest terms, the best price rule requires that whenever a drug 
company gives a deeper discount to an insurance plan, PBM, or other 
purchasing entity than the current discount offered to the states' 
Medicaid programs, the deeper discount must be offered to the states as 
well.
    While on the surface this may seem to be a logical requirement, in 
practice, the rule has created a floor price for many branded drugs, 
thus inhibiting competition on price among the pharmaceutical 
manufacturers with similar products. Because the Medicaid best price 
and Federal Supply Schedule (FSS) pricing structures require the most 
favorable pricing available to any entity, manufacturers use the 
requirement as a shield against aggressive negotiations by private 
sector companies such as ours. The net effect is to artificially buoy-
up the price to all purchasers since a pricing concession that would 
discount a product below the Medicaid or FSS price would result in 
substantial losses for the public book of the manufacturer's business.
    The reason is simple. The rule limits the effect that competition 
from multiple private purchasers--health plan PBMs, insurers, 
hospitals, clinics and pharmacies--can have on price because the drug 
companies would be required to give that same price to all 50 state 
Medicaid programs as well. It is not a bargain for the manufacturers 
and results in the states paying a higher price or floor for the drugs 
provided under the program.
    A further complication is that PBMs do not know the ``Best Prices'' 
for drugs and have no realistic way of learning this information. Thus, 
if a pharmaceutical company states in negotiations that it can not give 
a bigger discount because of ``Best Price'' considerations, the PBM has 
no way to verify or rebut this claim. In effect, while the best price 
rule was intended to reduce costs, it has become a good example of 
price controls failing to achieve the original purpose and raising drug 
prices for all consumers.

                               Conclusion

    In closing, we would commend the Subcommittee for seeking solutions 
to the payment issues created under the AWP reimbursement system. We 
would like to emphasize two key points: first, we support a system that 
allows for competition; and second, we believe it is critical that the 
ability of Prescription Solutions and similar entities to continue to 
achieve their quality management goals through integrated purchasing 
and management systems is not compromised. We believe that Prescription 
Solutions' PBM model--a closely integrated component of a health plan 
delivery system--is a template for how drug coverage and quality 
management can provide value to beneficiaries and decrease the overall 
cost of healthcare. Thank you for the opportunity to testify.

              Prescription Solutions PBM Structure





[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]





                               

    Chairman JOHNSON. Thank you, Mr. Jones. Ms. Glaun?

  STATEMENT OF KIM GLAUN, WASHINGTON COUNSEL, MEDICARE RIGHTS 
                   CENTER, NEW YORK, NEW YORK

    Ms. GLAUN. Good morning, Madam Chairman. My name is Kim 
Glaun, and I am the Washington Counsel at the Medicare Rights 
Center. The Medicare Rights Center is a national consumer 
service organization with offices in New York, Washington, and 
Baltimore, working to ensure that older and disabled Americans 
get good, affordable health care.
    Every year, the Medicare Rights Center hears from more than 
60,000 Americans with Medicare who have questions about their 
Medicare benefits, rights, and options. Thank you for inviting 
me to share with the Subcommittee the consumer perspective on 
Medicare's payment scheme for covered drugs.
    Every day, the Medicare Rights Center hotline hears from 
scores of older and disabled Americans who cannot afford their 
prescriptions. Medicare's current policy of covering only a 
limited number of drugs and paying for them based on the 
average wholesale price often forces elderly and disabled 
persons with cancer and other serious medical conditions to 
spend more out of pocket than their small fixed incomes allow. 
This policy should be changed.
    Take, for example, Mrs. Thomas. While she is fictional, we 
have spoken to countless men and women like her who face the 
same difficulties she does in getting critical care. Mrs. 
Thomas is 75 years old and lives in Texas, which, like most 
States, does not have a State pharmaceutical assistance 
program. Like the majority of people with Medicare, Mrs. Thomas 
suffers from two chronic conditions, congestive heart failure 
and cancer. Like the typical person with Medicare, her annual 
income is about $16,000, too high for her to qualify for 
Medicaid or other low-income assistance programs.
    For someone like Mrs. Thomas, out-of-pocket costs for 
medications and treatment for her heart condition alone could 
easily cost $5,000 annually. A Medicare supplemental policy to 
fill voids in Medicare could cost her $1,500 annually. If Mrs. 
Thomas cannot afford supplemental insurance, she will need to 
pay all Medicare gaps herself and is likely to forego critical 
treatment.
    Like most older and disabled Americans, Mrs. Thomas needs 
Medicare to offer a good, affordable prescription drug benefit. 
Instead, Medicare only offers her limited coverage for some of 
her cancer drugs. The current policy of basing Medicare 
reimbursements on the AWP directly harms Mrs. Thomas and 
millions of other vulnerable and older disabled men and women.
    First, as the U.S. General Accounting Office has documented 
and my fellow witnesses and Administrator Scully have testified 
today, the AWP bears little relation to the amount doctors and 
suppliers actually pay for drugs and is grossly inflated. 
Because Medicare patients pay 20 percent of the amount Medicare 
reimburses for drugs and Medicare premises payment rates on the 
inflated AWP, older adults and persons with disabilities are 
overpaying for their medications.
    Second, Medicare's inflated payments for medications drive 
up the costs of Medicare supplemental policies. Insurers pass 
on to policy holders the cost of inflated coinsurance payments 
through premium increases. Premium hikes have made supplemental 
policies unaffordable for a growing number of older and 
disabled Americans with Medicare.
    Third, the AWP creates perverse financial incentives that 
could result in inappropriate prescribing at the expense of 
people with Medicare's health and quality of care. The 
difference or spread between the AWP-based price and the price 
a physician actually pays for the drugs is essentially profit. 
The greater the difference between the Medicare price and the 
actual price, the more profit a physician keeps. The government 
should not be perpetuating a system that induces doctors to 
prescribe drugs based on their own financial gain rather than 
clinical efficacy.
    In sum, Medicare's current policy of pegging drug 
reimbursement under part B to the arbitrary AWP subsidizes 
physicians, suppliers, and manufacturers at the expense of 
older and disabled Americans and America's taxpayers. It is due 
time that Medicare use its market leverage to lower 
prescription drug prices for people with Medicare rather than 
accept the pharmaceutical industry's pricing structure as a 
given. A Medicare policy of paying prices that the 
pharmaceutical industry charges its most favorite customers 
comports with Medicare's pricing practices for doctors, 
hospitals, providers, and suppliers. A more rational payment 
system will protect people with Medicare, the common good, and 
the public purse.
    Congress must respect the need to pay doctors and hospitals 
rates that encourage them to continue to serve people with 
Medicare, but moving toward a system based on acquisition costs 
would institute much needed, reasonable reforms and success in 
lowering both people with Medicare's cost sharing and taxpayer 
expenditures for currently covered drugs.
    In conclusion, we urge you to save the Medicare Program 
from wasteful expenditures and to conserve those dollars to 
help more people with Medicare get good, affordable 
prescription drugs. Thank you.
    [The prepared statement of Ms. Glaun follows:]
Statement of Kim Glaun, Washington Counsel, Medicare Rights Center, New 
                             York, New York
    Good morning, Madam Chairman. My name is Kim Glaun, and I am the 
Washington Counsel at the Medicare Rights Center.
    The Medicare Rights Center is a national consumer service 
organization, with offices in New York and Washington, working to 
ensure that older and disabled Americans get good, affordable health 
care. Under a contract with the New York State Office for the Aging, 
with funding from the Centers for Medicare and Medicaid Services, we 
operate New York State's Health Insurance Assistance Program hotline. 
We also operate a National Medicare HMO Hotline that assists elderly 
and disabled Americans who are struggling to get needed care and 
coverage from their HMOs.
    Every year the Medicare Rights Center hears from more than 60,000 
Americans with Medicare, who have questions about their Medicare 
benefits, rights and options and problems accessing critical care. 
Their greatest problem by far is securing affordable prescription 
drugs. We thank you for inviting MRC to share with the Ways and Means 
Committee Subcommittee on Health the consumer perspective on the issue 
of prescription drug costs for people with Medicare.
Ensuring Older and Disabled Americans Get the Prescriptions They Need
    Every day, MRC hears from scores of older and disabled Americans 
who cannot afford their prescriptions. Even those fortunate enough to 
have coverage for some of their medications under Part B or through a 
Medicare HMO struggle to afford premiums and copays for this coverage. 
Medicare's current policy of covering only a limited number of drugs--
and paying 95% of the Average Wholesale Price for these drugs--often 
forces elderly and disabled individuals with cancer and other serious 
medical conditions to spend more out of pocket than their small fixed 
incomes allow and they should be expected to pay. This policy should be 
changed.
    Take for example, Mrs. Thomas, an amalgam of Medicare Rights 
Center's clients. She is 75 years old and lives in Texas, which, like 
most states, does not have a state pharmaceutical assistance program. 
Like the majority of people with Medicare, Mrs. Thomas suffers from two 
chronic conditions, congestive heart failure and cancer. Like the 
typical person with Medicare, her annual income is about $16,000, too 
high for her to qualify for Medicaid or other low-income assistance 
programs. Like most people with cancer and congestive heart failure, 
she is on multiple medications.
    The Centers for Medicare and Medicaid Services estimates that out-
of-pocket costs for medications and other health care needs relating to 
congestive heart failure alone can easily cost someone like Mrs. Thomas 
close to $5,000 a year. On top of that she would pay about $1,500 a 
year for Medicare supplemental coverage to fill other gaps in Medicare. 
If she cannot afford to pay for this coverage and opts to pay the 
coinsurance costs herself, she will have to spend even more and is 
likely to go without critical treatment. Like many people the Medicare 
Rights Center hears from, Mrs. Thomas is thinking about buying her 
drugs from Canada on the Web, a practice that is illegal but that more 
and more older and disabled Americans are following as a way to get 
affordable medications.
    Like most older and disabled Americans, Mrs. Thomas needs Medicare 
to offer a good, affordable prescription drug benefit. Instead, 
Medicare only offers her limited coverage for some of her cancer drugs. 
The current policy of paying 95% of the Average Wholesale Price for 
these drugs directly harms Mrs. Thomas and millions of other vulnerable 
older and disabled men and women. It also needlessly saps money from 
the Medicare program and taxpayers to the clear benefit of the 
pharmaceutical industry and certain providers.
    First, the AWP is a price that manufacturers derive using their own 
criteria and is not defined by any Federal law or 
regulation.[i] The fact is, as recognized by the U.S. 
General Accounting Office, the Average Wholesale Price is neither 
``average'' nor ``wholesale.''[ii] It is much higher than 
what most other American purchasers are paying for these drugs. So long 
as Medicare pays for drugs based on the average wholesale price--and 
not on the much lower prices paid by other large purchasers--people 
with Medicare will often end up paying much higher coinsurance for 
their covered drugs than they would otherwise be paying.
---------------------------------------------------------------------------
    \[i]{\Gencarelli. Dawn M., Average Wholesale Price for Prescription 
Drugs; Is There a More Appropriate Pricing Mechanism? Issue Brief No. 
775, National Health Policy Forum, June 7, 2002, 2, list visited on 
October 1, 2002 from http://www.nhpf.org/pdfs/8-775+(web).pdf.
    \[ii]{\Laura A. Dummit, Medicare Outpatient Drugs: Program Payments 
Should Better Reflect Market Prices, testimony before the Senate 
Finance Subcommittee on Health, March 14, 2002 (GAO-02-53IT). William 
J. Scanlon, Medicare Part B Drugs: Program Payments Should Reflect 
Market Price, testimony before the Subcommittee on Health and the 
Subcommittee on Oversight and Investigations, US House Committee on 
Energy and Commerce, September 21, 2001, (GAO-01-1142T), US General 
Accounting Office, Washington, DC, 2, accessed October 1, 2002 at 
http://www.gao.gov/new.items/d011142t.pdf.
---------------------------------------------------------------------------
    Second, these inflated prices for Part B medications drive up the 
cost of Medicare supplemental insurance, which millions of people with 
Medicare purchase to fill Medicare's coverage gaps. Medigap insurers 
must pay more in coinsurance for Part B covered prescription drugs than 
they would be paying if the Federal Government paid a lower price for 
these drugs. Of course, Medigap insurers simply pass these costs on to 
their policyholders by raising their premiums. As a result, the data 
shows that an increasing number of older and disabled Americans with 
Medicare, people like Mrs. Thomas, can no longer afford these 
policies.[iii]
---------------------------------------------------------------------------
    \[iii]{\Pourat, N., T. Rice, G. Kominski, and R.E. Snyder, 200. 
``Socioeconomic Differences in Medicare Supplemental Coverage.'' Health 
Affairs 19 (5): 186-96. The Detroit News, Business, B, August 14, 2002.
---------------------------------------------------------------------------
    Third, the AWP creates perverse financial incentives that could 
result in inappropriate prescribing at the expense of people with 
Medicare's health and quality of care.[iv] The difference, 
or ``spread'', between the AWP-based price and the price a physician 
actually pays for the drugs is essentially profit. The greater the 
difference between the Medicare price and actual price, the more profit 
a physician keeps.[v] The government should not be 
perpetuating a system that motivates doctors to prescribe drugs based 
on their own financial gain rather than the best treatment for the 
thousands of people with Medicare like Mrs. Thomas.[vi]
---------------------------------------------------------------------------
    \[iv]{\At root, the AWP is a marketing tool, utilized and 
manipulated by the physicians, suppliers and manufacturers to gain 
profit. See Rep. Sherrod Brown, Congressional Hearing: Medicare Drug 
Reimbursement: A Broken System For Patients and Taxpayers, September 
21, 2001 Washington, DC, Energy and Commerce Committee--Subcommittee on 
Oversight and Investigations, last visited on October 1, 2002 at http:/
/www.kaisernetwork.org/health__cast/uploaded__files/ACF121.pdf
    \[v]{\Janet Rehnquist, testimony before the Senate Committee on 
Finance, March 14, 2002 Washington, DC, last visited on October 1, 
2002, 3, at http://oig.hhs.gov/testimony/docs/2002/020314fin.pdf.
    \[vi]{\Companies and individuals have taken advantage of these 
perverse incentives. Recent litigation has highlighted how 
pharmaceutical companies can manipulate the AWP to increase profits. 
Most recently, in October, 2001, TAP Pharmaceuticals agreed to pay 
almost $900 million to settle a civil and criminal lawsuit brought by 
the United States and other private and governmental entities. TAP paid 
substantial criminal and civil fines for allegedly developing and 
implementing a fraudulent pricing scheme, as well as for marketing 
misconduct, in connection with their drug Lupron. See U.S. v. Tap 
Pharmaceuticals Prod., Crim. No. 01-CR-1-354-WGY (D. Mass. December 4, 
2001), sentencing memorandum available at http://www. 
prescriptionaccesslitigation.org/documents.htm (last visited October 1, 
2002). Similarly, Bayer agreed to pay $14 million to settle a lawsuit 
alleging that they had improperly inflated the AWPs for a number of 
Bayer drugs, including AIDS and hemophilia drugs. Associated Press, 
Report: Bayer to Pay $14 Million in Probe of Drug Prices, at http://
fyi.cnn.com/2000/health/09/18/bayer.drugs.ap (last visited Oct. 1, 
2002).
---------------------------------------------------------------------------
    Finally, when the Federal Government overpays for prescription 
drugs, it drains the Medicare Trust Fund and harms all U.S. 
taxpayers.[vii] The Federal Government negotiates discounted 
drug prices on behalf of veterans, Department of Defense employees and 
retirees, and other Federal employees and retirees.[viii] 
The Federal Government should assure real discounted prices for 
Medicare-covered drugs.
---------------------------------------------------------------------------
    \[vii]{\Chairman Bilirakis, Congressional Hearing: Medicare Drug 
Reimbursement: A Broken System For Patients and Taxpayers, September 
21, 2001 Washington, DC, Energy and Commerce Committee--Subcommittee on 
Oversight and Investigations, last visited on October 1, 2002 at http:/
/www.kaisernetwork.org/health__cast/uploaded__files/ACF121.pdf
    \[viii]{\Supra note 2, at 2 (``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 sum, Medicare's current policy of pegging drug reimbursement 
under Part B to 95% of an arbitrary AWP subsidizes physicians, 
suppliers and manufacturers, at the expense of older and disabled 
Americans and America's taxpayers.
Helping People with Medicare While Preserving the Medicare Trust Fund
    It is due time that Mrs. Thomas and the millions of people in 
similar financial and health situations be able to afford the 
medications they need. It is long past time for Medicare to use its 
market leverage to lower prescription drug prices for people with 
Medicare rather than accept the pharmaceutical industries' pricing 
structure as a given. A Medicare policy of paying prices that the 
pharmaceutical industry charges its most favored customers is both 
consistent with Medicare's pricing practices with doctors, hospitals 
and other providers and suppliers and in the interest of people with 
Medicare, the common good and the public purse.
    Congress must respect the need to pay doctors and hospitals rates 
that encourage them to continue to serve people with Medicare. But 
moving toward a system based on acquisition costs would institute much 
needed, reasonable reforms and success in lowering both people with 
Medicare's cost-sharing and taxpayer expenditures for currently covered 
drugs.
Conclusion
    In conclusion, we urge you to save the Medicare program from 
wasteful expenditures and help more people with Medicare to get good 
affordable prescription drugs. Every dollar the Federal Government 
saves through lower prescription drug prices under Medicare Part B is 
money that can go to covering additional prescription drugs that 
millions of people with Medicare desperately need.
    I thank the Ways and Means Committee Subcommittee on Health for 
this opportunity to testify on behalf of older and disabled Americans.

                               

    Chairman JOHNSON. Thank you very much. I thank the panel 
for their testimony. Ms. Glaun, I thank you for your eloquent 
description of the burden that high-priced drugs place on our 
elderly. I am hopeful that we will pass some prescription drug 
legislation this year. I am very proud that this Committee did 
get a bill through the House, that particularly for the low-
income seniors would take essentially all the costs off them, 
so I certainly share with you that concern.
    I also am very conscious of the copayment burden that high-
cost drugs place on our seniors and the danger of the spread 
driving a physician's decision as to what to use. In light of 
the testimony that indicates that 80 percent of our seniors get 
chemotherapy in practice-based cancer treatment centers, do you 
have any concern about access to those centers if we 
concentrate only on price and not on practice?
    Ms. GLAUN. I completely agree with the parties that have 
testified and you, Madam Chairman, as well, when you have said 
that at the same time we fix the prices that Medicare is 
paying, that we need to adequately reimburse providers and 
physicians for their practice expenses. Our goal is to assure 
access to quality care for our beneficiaries.
    Chairman JOHNSON. Thank you very much.
    Dr. O'Grady, and Mr. Jones, you can enter in on responding 
to this question if you care. Dr. O'Grady, you mentioned that 
the evidence is in on competitive bidding, and yet CMS has done 
one competitive bidding in one county in Florida and one 
competitive bidding in one city in Texas. They competitively 
bid hospital beds, urological supplies, surgical dressings, 
wheelchairs and accessories, and general orthotics. The only 
drugs they competed were nebulizers and oxygen.
    Now, to take that evidence and assume that you can 
crosswalk it over to chemotherapy drugs is, in my mind, risky. 
I believe competitive bidding has a place here, there is no 
question about that. The examples that you give of competitive 
bidding are amongst plans, and you also Mr. Jones, when a plan 
bids competitively or uses the competitive approach in 
purchasing, they have underneath them an integrated delivery 
system and that is our problem. We do not have underneath drug 
pricing and Medicare an integrated delivery system, and if we 
do not pay properly for that, as Mr. McCrery said in his 
questioning, which I had to miss some of, we should not have to 
be doing this. If we had integrated delivery systems in 
Medicare, we would not have to be doing this.
    We do have to do this. So, in a sense, the Federal Employee 
Health Benefit Plan analogy and Mr. Jones' Prescription 
Solutions analogy, while useful and demonstrating the power of 
competitive bidding, particularly in the setting of integrated 
care delivery systems, in a sense, it circumvents the hardest 
part of the nut that we have to crack.
    So, I would like your comments on how do we get at the 
practice expense. Then I just want to go on to Dr. Bunn. I want 
him to be thinking about it. I mean, we need to understand, 
what are these drugs we are talking about? When I read about 
their toxicity, what is it? I go through a clinic, and they 
show me a drug that if it gets misplaced and does not go 
through the needle and it gets in the skin, it can cause a 
chain of erosion.
    So, I want us to understand a little more clearly, not only 
what competitive bidding might do for us, but the terrific 
challenge we face in managing the delivery of highly toxic 
drugs that are highly sensitive to temperature and other 
things. I do not think, Mr. Reeb, that the OIG has done any 
investigations of these particular kind of drugs. The examples 
we are getting are from Albuterol and others that are more 
simple, either orally or nebulizer or injectably taken.
    So, this issue of systems of delivery is the hard nut to 
crack here. We cannot dodge it or seniors will not have access 
to care. It is that simple. Dr. O'Grady and Mr. Jones, if you 
would like to comment, and then, Dr. Bunn, if you would like to 
comment, and finally, Mr. Reeb, if you would like to comment, 
you are welcome to do so.
    Dr. O'GRADY. Sure. To start off in terms of thinking about 
the competitive bidding demo and also where this sort of 
negotiation and bidding has been done in the past, and is there 
enough of a track record to have some confidence to move 
forward? Certainly, CMS has done a good job on this particular 
demo. They have also followed up to find out whether there was 
any problem with access, any problem with the quality of care 
that the beneficiaries received, and they had outside people 
come in from the University of Wisconsin, and kind of verify 
what was going on and do the evaluation. That all came back 
fairly positively.
    Broader than that, you are absolutely right that the 
experiment was on Albuterol. We know that from other public 
purchasers, as well as private, including FEHBP, that this 
notion of negotiating prices has certainly gone on for quite a 
long time. It certainly works well within an integrated setting 
where you can have this balance, that Mr. Jones talked about. 
It is also, as Mr. Scully said, with the pre-65 population, the 
Blue Cross-Blue Shield plans are doing this sort of stuff all 
the time.
    My point would not be that this is only one part of the 
things to do. Certainly, you have to look at the other part of 
the issue and make sure that the overall payment makes sense. 
If it does not make sense, at some point, you will hit some 
access problems.
    So, it is certainly within Medicare's prime set of 
responsibilities to make sure that they pay fairly, but mostly 
that is to be because of their responsibility to beneficiaries 
to protect them, and if they do not get the price right, that 
will hurt beneficiaries. It is also balancing that protection 
that they have to provide to taxpayers.
    Chairman JOHNSON. It does not bother you that none of the 
things that they have had experience in competitive bidding 
with are complicated to deliver, that their experience, in 
fact, is extremely limited?
    Dr. O'GRADY. I think it would be a better experimental 
design to use some of those drugs that you are talking about 
and then find out, how much does the price come down?
    The one thing I would also like to be quite clear on this 
is if you look carefully at that report, there are other things 
that go on there where, after competitive bidding, the price 
was higher. Now, part of that is back to the point I made about 
it is very hard in an administered price system to get the 
price right, different locations, different things. Things 
change.
    Chairman JOHNSON. I appreciate that.
    Dr. O'GRADY. So you are trying to pay kind of an accurate 
price, and this sort of one-size-fits-all approach sometimes 
overpays, other times underpays. A better situation in a public 
policy sense would be something that could adapt to change, 
adapt to different parts of the country, different markets, and 
take that into account. That is one of the real positive 
aspects of competitive bidding.
    Chairman JOHNSON. Mr. Jones?
    Mr. JONES. Prescription Solutions has a number of clients 
that it serves as a PBM. PacifiCare is the largest of them. We 
have other clients that are not integrated, and they look for 
savings when it comes down to injectable drugs, as well.
    Because we purchase large amounts of injectable drugs from 
the manufacturers, we get good prices for all of our clients. 
The delivery systems in delivering it to a clinic or to 
physician offices is no different than the drug company would 
use. We use the same protections in trying to make sure they 
are shielded from temperature and humidity and all of those 
things. So, the physician would get the drug product in the 
clinic similarly as if they ordered it directly, but they would 
be able to take advantage of our purchasing power.
    So, it is really not much different than that. It is just 
that we get better pricing because we are----
    Chairman JOHNSON. Excuse me. I guess I did not quite 
understand. So you only deal with the drug component? You do 
not deal with the reimbursement to the physician and the 
system?
    Mr. JONES. In a non-integrated system, you are exactly 
right. It is the drug alone.
    Chairman JOHNSON. Furthermore, because we do also have 
reports from users in California about problems, would you be 
happy to work with us on any problems that you have seen 
develop?
    Mr. JONES. Surely.
    Chairman JOHNSON. Dr. Bunn?
    Dr. BUNN. Thank you for the opportunity. I agree with you 
entirely. There are issues of quality as well as cost, and, of 
course, as a physician, we are concerned with quality.
    I guess the example that was incited this morning and, I 
think, your examples were outstanding, of course, was the 
pharmacist in St. Louis who decided he could make money by 
diluting the drugs, and certainly the physicians would not feel 
that a system that allowed that to happen is one that either 
the Congress or the physicians should support. So, we are 
certainly not opposed to some competitive system that would 
ensure quality and that the physician has some control over the 
quality.
    You are also quite right that these agents are mixed and 
they are toxic, and the way they are mixed and the way they are 
stored is extremely important. Many of these will become 
inactive at improper temperatures, with improper shipping or 
storage. If they show up in a doctor's office overnight express 
and sit there outside and they need to be refrigerated, 
obviously, that is not going to work.
    So, basically, I think what you said we would reiterate, 
and I think you said it very well.
    Chairman JOHNSON. Dr. Bunn, if we were motivated, could we 
be using some of the dosages that are left? For instance, if 
you open something and you use half of it, could we be using 
the other half for a patient that is also there at the same 
time if we were allowed by law? Should we be looking at the 
sheer waste we impose on the system because something was 
opened?
    Dr. BUNN. That example would not be a great thing to be 
doing, but things could be packaged potentially differently by 
pharmaceutical manufacturers to optimize the flexibility so as 
not to have waste. Using the same vial with multiple needle 
sticks would not probably be the best way to get at that.
    Chairman JOHNSON. What about the personnel that are 
required? The practice expense formula looks at physician work 
hours, but we have a hard time taking into account non-
physician contributions. You mentioned in your statement the 
highly qualified support staff that clinics depend on. Could 
you describe that in a little more detail and also some of the 
equipment and insurance costs that are also part of the 
practice expense bundle, that if not taken into account, will 
not enable people to stay in the practice of delivering cancer 
care?
    Dr. BUNN. Right. We believe there have been two fundamental 
problems with the practice expense side. First of all, there 
was inadequate data and an inadequate database for which to 
estimate the true costs. You brought up today, we agree 
entirely with you that the GAO data is totally flawed and 
totally inadequate. We agree that the CMS is has also not 
developed adequate data. We do believe that the Gallup survey 
now does provide that data.
    We also believe, as you alluded to, that there is a flawed 
methodology for making the calculations that is biased against 
non-physician work, and it does happen that oncology practices 
have the largest amount of that. So, we believe that in 
addition to using the new data provided, both ASCO and the 
Congress need to work with CMS to develop an adequate 
methodology to account for those true expenses, which are the 
non-physician-related expenses that are largely attributable, 
like anything, to personnel, largely trained nurses, 
pharmacists, and other health professionals. Each oncology 
office has a large number of those.
    Chairman JOHNSON. Thank you very much.
    Mr. Reeb, would you just clarify for the record, if you 
know--I am not sure whether you know or not, but has the OIG 
looked at drugs used in chemotherapy or have the drugs that 
they have focused on studying been more like Albuterol?
    Mr. REEB. We have looked at both oncology drugs and other 
drugs, but our work has come from the pricing side. We are a 
problematic looking kind of an agency. The spread that is 
created with the AWP difference to the acquisition costs, 
whether it be at a physician's office or whether it be from a 
Medicaid agency in their program. So, we have not looked--I 
mean, we have focused on that because the amount of money at 
stake allows for these kind of situations to develop.
    Chairman JOHNSON. You have not done any work on what the 
cost of the delivery system is and whether it is more or less 
than the spread?
    Mr. REEB. No, ma'am.
    Chairman JOHNSON. I mean, it is also conceivable that in 
some instances, it could be more than the spread, it could be 
equal to the spread, it could be less than the spread, or it 
could be a lot less than the spread.
    Mr. REEB. Yes, exactly.
    Chairman JOHNSON. Okay. Thank you.
    Mr. REEB. We have not done work in that area.
    Chairman JOHNSON. Mr. Stark?
    Mr. STARK. Thank you, Madam Chair. I would like to thank 
all of our witnesses, in particular Mr. Reeb and Mr. Vito from 
the OIG, whose work in this area has called our attention to a 
serious problem that we hopefully can correct and save the 
government some money. Unfortunately, you do not get a raise. 
You guys ought to work on commission. You would be better off. 
We do appreciate and the public will appreciate the work that 
you do.
    Ms. Glaun, the work that you do for beneficiaries also 
should not go unnoticed, and I am sure that my colleagues in 
Maryland send their constituents to you frequently and that you 
are a great deal of assistance. Unfortunately, California is a 
little long distance for us to refer our constituent service 
cases to you, but we also appreciate the work that you do in 
this.
    I guess I just have a couple of questions. It seems to me, 
Dr. Bunn, if you will not mind my putting aside the question of 
reimbursement for practice expense, I am really not sure that 
is what this hearing is about. I recognize it as a problem, but 
aside from yourself, the people here, I think we are dealing 
more with the cost of the unit of a prescription that your 
colleagues administer. We do recognize that some of that 
problem has been exacerbated because of problems with the 
reimbursement for the professional services that your group 
renders.
    I hope that we can separate that. I hope that we can find 
an adequate reimbursement, an adequate, fair reimbursement 
system for the physicians. I hope that we can find an efficient 
way to get the best price to which we ought to be entitled from 
the pharmaceutical industry for our beneficiaries.
    I am not even sure it is a dispute or a disagreement, but 
there seems to be at issue whether or not we should bid for a 
pharmaceutical, the price of a drug, and then in what form. I 
do not hear any enthusiastic support for a winner-take-all. 
Somebody mentioned in the testimony, Dr. O'Grady, that you 
could underpay. Now, I am missing something. If you are talking 
about underpaying Dr. Bunn's gang, I am with you. How would you 
underpay AMGEN for Epoetin alfa (EPO) once you set a price for 
it? It is the same EPO in Wapakoneta, Ohio, as it is in 
Oakland, California, is it not?
    Dr. O'GRADY. One of the things that can happen here, and I 
guess the best example I can think of right now is--one of the 
things involved when CMS tries to do this, that is just a very 
tough nut for them to crack, is that there is always this lag 
having to do with the data that they collect. So they are 
always working from about 2 years behind.
    Mr. STARK. Okay----
    Dr. O'GRADY. No, but----
    Mr. STARK. I am with you, but once you set a price for a 
pharmaceutical that is in a specially compounded potion, and if 
you are buying basically branded, ethical prescription drugs, 
you cannot underpay for it. I mean, you are paying the same 
price across the country. There is nothing wrong with that, is 
there?
    Dr. O'GRADY. No.
    Mr. STARK. Okay.
    Dr. O'GRADY. It is not so much that. It is more the idea 
that the price changes, and you have not taken it into account.
    Mr. STARK. All right. I just wanted to--because the 
question comes up, and Mr. Scully was talking about it, that if 
you have got a lot of clout, a big purchasing base, you can get 
a better price than some small clinic in a small State that 
does not have the market clout to demand a lower price based on 
volume.
    To that end, I would ask Mr. Jones to deal with the issue 
that was brought up where you find that we can get, what, a 25 
percent savings in these, as Mr. Scully pointed out, but we can 
get almost a 65 or 80 percent savings, a lot more, where we 
took the actual price. So, why should we not do it with the 
actual price as long as that dichotomy holds?
    Mr. JONES. Our company would try to assess on a regular 
basis what that actual price is. Because we also buy drugs, we 
have a pretty good indication of----
    Mr. STARK. So we pay based on what you pay, right?
    Mr. JONES. They take advantage of that, yes.
    Mr. STARK. I mean, that is what I would think. Do you know 
whether PacifiCare uses more than one PBM to service its 
beneficiaries?
    Mr. JONES. No. It is one PBM. It is ours. We are a 
subsidiary company of PacifiCare.
    Mr. STARK. Even if you were not, would it not be to their 
advantage to use one? Would they not get better prices by 
concentrating their buying power in one provider?
    Mr. JONES. In this case, almost every year, the question is 
are we giving PacifiCare the very best deal, and they will 
actually make us compete against competitors. They will invite 
people in to check, yes.
    Mr. STARK. How many of your other clients--you serve other 
managed care plans.
    Mr. JONES. Yes.
    Mr. STARK. How many of them have multiple PBMs?
    Mr. JONES. There are a few, not many. Most of them will 
choose one after a competitive process.
    Mr. STARK. Although that is a concern that we have heard 
here if the government went to bidding, and there are some 
impracticalities, some people may not be able to serve the 
entire country, but I am just trying to find out, my sense is 
that if we do go to bidding, which I am less comfortable with, 
we do not have a system, that the extreme, the most competitive 
would be winner-takes-all, would it not? That really would be 
the toughest competition.
    Mr. JONES. If that winner can provide all services----
    Mr. STARK. Yes. You hit it right on the head. If they could 
provide the quality and the coverage for the market.
    Mr. JONES. Then there is the issue of ongoing competition. 
A winner with a long contract may not be that----
    Mr. STARK. Then the price goes up and you have knocked the 
other competitors out of the box, so there is nobody to come up 
and bid the next time.
    Mr. JONES. Yes.
    Mr. STARK. That is a good observation, and it further is a 
problem. I think this is between us and the Committees here 
and--I still want to say Health Care Financing Administration, 
I can never remember what their name is now--between CMS, we 
are going to have to figure out what is a system. It seems that 
we could go to the actual price now and phase into something 
else if that worked.
    Dr. Bunn, did you want to add something to the discussion?
    Dr. BUNN. I think there are a couple of other facts in the 
drug cost besides what you just mentioned, which is what you 
pay for. First of all, these drugs have to be given on a very 
set schedule and they have to be available when the patient is 
due. If you delay, it is going to decrease the effectiveness.
    So, there are several things here that will adversely 
affect a rural practitioner. Again, you have to have an 
inventory and you have to have it available at the time. If, 
for example, the patient progressed or had some toxicity, then 
you would be stuck with that drug and that drug might go out of 
date before it could be used in another patient in a rural 
area. Also, sometimes the pharmacist or the nurse make a 
mistake and spill the drug. Obviously, this is not often, but 
that is an added cost. You cannot bill that to somebody else. 
So, that is sort of a cost of the drug that has to be taken 
into consideration, as well.
    So, I think there are some issues with inventory and 
wastage and so on that have to be considered in the cost, as 
well.
    Mr. STARK. Keep going. How does that--so I will stipulate 
to that. Now, what is better, to use an average price across 
the Nation so that the Marshfield Clinic pays the same amount 
as Kaiser in Oakland, or do you suggest a different system that 
would resolve that problem? Finish that up.
    Dr. BUNN. Well, I think we all have the same goal, which is 
come the closest to the actual cost as possible. I am not sure 
that having an average cost for the entire United States of 
America would be best, because, obviously, the cost in a 
physician practice is going to be different, and then you are 
going to create some huge winners and some huge losers.
    Mr. STARK. Can you generalize, and my time is up, but Dr. 
Bunn, can you generalize for us, in the non-Medicare payers, 
Blue Cross, whomever, when they reimburse oncologists, do they 
pay for spillage, wastage, how do you bill there? Is it 
different from what we have been discussing here? Is there a 
general standard procedure that the Blues across the country, 
say, would reimburse your members for non-Medicare payers that 
is different from what we are talking about today?
    Dr. BUNN. Largely not. As you know, government to a certain 
extent sets standards. I would say in non-Medicare patients, we 
have some of the same cross-subsidization going on where 
actually the insurance companies will a bit overpay for the 
drugs, knowing that practice expenses and spillage and so on 
are going to be covered by the overage. Again, we do not think 
that is probably the best way for either the insurance company 
or the government to be reimbursing.
    Mr. STARK. Do they pay you as a percentage of average 
wholesale or do they negotiate a rate with you, a price for the 
drug? How is that done?
    Dr. BUNN. It is actually variable, but in many instances, 
it is the same as the government.
    Mr. STARK. Thank you. Thank you, Madam Chair.
    Chairman JOHNSON. Thank you very much. Congresswoman 
Thurman?
    Mrs. THURMAN. Madam Chairman, a lot of the questions have 
been asked today. We have kind of exhausted some of this, but 
maybe you can just help me reemphasize a little bit of this, 
because one of these competitive bidding areas is now in a new 
part of the district, so obviously I am going to be more 
actively involved in the competitive bidding issue.
    I would say to Dr. O'Grady, when you talk in your 
testimony--and if this has already been answered, it is okay, I 
am just trying to clarify it--recent findings from Medicare's 
competitive bidding demonstrations for durable medical 
equipment in which Medicare saved 25 percent over what it would 
have otherwise paid for one particular drug, Albuterol, based 
on these findings, you argue that Medicare should undertake 
competitive bidding. When GAO reported in September 2001 that 
the average widely available discount from AWP in 1999 for the 
unit dose form of Albuterol was 85 percent, why should Medicare 
just accept the savings of only 25 percent when discounts of 85 
percent are widely available to us?
    Dr. O'GRADY. I think that the difference between the 85 and 
the 25 percent figure are a big question mark. This was not 
done in Polk County. This was done over in San Antonio. So, 
what they did is have a number of bidders who went out and 
negotiated.
    Now, back to Mr. Stark's point, it was not a winner-take-
all. It was so that the providers could, or in this case the 
beneficiaries were choosing this for their nebulizers, could 
pick between a number of different suppliers, and so it might 
be price that they pick on or it might be service or 
availability, things like that.
    Now, when they negotiated this, they got 25 percent off the 
Medicare rate and the GAO guys found 80. I made a note to call 
GAO and ask them what was going on there, what they thought. 
Perhaps the folks from the Inspector General have a feel for 
what might explain that kind of a gap.
    Mrs. THURMAN. Mr. Jones, you wanted to respond?
    Mr. JONES. Albuterol is a good example of a drug that 
changes dramatically. If you bid, the product can fall in price 
fairly dramatically. So you can bid here and it falls down 
here, and your bid is still in effect.
    These drugs change often, dropping by 80 percent over a 6-
month time period once the patent expires and various 
competitors come onto the scene and produce it generically, and 
it is not uncommon for drugs to drop that rapidly. It makes us 
quickly take notice and try to adjust, and it is one of the 
issues of how you establish your contracts, can you take 
advantage of those pricing drops.
    I empathize in doing a pilot in trying to get a window in 
time on the costs of things. It is difficult to do.
    Mrs. THURMAN. Mr. Reeb, do you have anything to add to 
that?
    Mr. VITO. Yes, ma'am. I believe that the price of Albuterol 
that we were able to track over time has dropped significantly, 
yet the AWP has remained the same. That is why the Medicare 
Program has continued to pay that amount of money, because they 
base their reimbursement on AWPs, not on the acquisition costs 
that people were able to get the product for.
    Mrs. THURMAN. Dr. Bunn, I also am concerned with what 
happens to some--we have a lot of larger areas, and then, quite 
frankly, what I am seeing out there is that there actually are 
larger cancer centers now than there have been in the past. I 
am curious of how smaller groups or sole practitioners actually 
purchase their medicines, and how do we give them the 
opportunity to participate in any of this? It is a real concern 
when you have a lot of rural areas around. How do they do it? 
What happens to them? Do we end up losing some folks and not 
giving them the care because of this?
    Mr. JONES. I have experienced both in rural and urban 
areas. I have lived most of my life in rural areas, and I have 
lived the last 30 years in urban areas. We have buying groups 
that are available to small pharmacies and mom-and-pop stores 
as well as the mega-chains that have their own buying 
structure. It is not impossible for smaller pharmacies to 
aggregate and get better pricing.
    Mrs. THURMAN. Ms. Glaun, did you want to add to that? You 
looked like you were----
    Ms. GLAUN. No.
    Mrs. THURMAN. Okay. My time is up, but we thank you all 
and, hopefully, we can all sit down and work some of this out 
together. Always remember, it is about the patient and us on 
this end who have to worry about the taxpayers.
    Chairman JOHNSON. I thank the panel very much. That was 
very interesting, Mr. Jones, the varied sizes of buying groups 
within the same structure. Perhaps we will follow up on that 
later.
    Thank you all very much for your testimony. I appreciate 
it. I do believe that this is a problem that needs to be 
addressed, that with adequate data and with a good methodology 
and with a legal structure that guarantees that we will be able 
to use the savings to reimburse practice costs, we should be 
able to save the taxpayers really a dramatic number of dollars 
and make Medicare more efficient and also a better program to 
serve our seniors. Thank you.
    Finally, I would like to include in the record a statement 
submitted by Laura Thevenot, Executive Director of the American 
Society for Therapeutic Radiology and Oncology, Incorporated.
    [The statement of Ms. Thevenot follows:]
 Statement of Laura Thevenot, Executive Director, American Society for 
                Therapeutic Radiology and Oncology, Inc.
Introduction and Summary
    The American Society for Therapeutic Radiology and Oncology, Inc. 
(``ASTRO'') is a professional organization of more than 7,000 members, 
including physicians (radiation oncologists), radiation scientists 
(radiobiologists, radiological physicists), radiation therapy 
technologists and radiation oncology nurses. These specialists comprise 
the expert medical team that uses radiation to treat patients with 
cancer. Radiation therapy is recognized as one of the most effective 
methods of treating cancer and other diseases. Between 50 and 60 
percent of cancer patients are treated with radiation at some time 
during the course of their disease. ASTRO's Membership represents 
community cancer centers and hospitals as well as major education and 
research centers from the U.S. and around the world. ASTRO publishes 
the leading scientific journal in radiation oncology in the world.
    ASTRO commends the Subcommittee on Health for examining issues 
related to Medicare payments for those prescription drugs that are 
currently covered by Medicare. However, ASTRO is concerned that 
proposals to revise Medicare's payment methodology for drugs, and to 
more properly reimburse medical oncologists for the practice expenses 
\1\ involved in the administration of cancer drugs, may have an 
unintended and adverse impact on continued patient access to high-
quality radiation oncology services. While we agree that there are 
weaknesses in Medicare's system for reimbursing medical oncology 
services, we are concerned about the potential unintended consequences 
of correcting these problems. We request that Congress include 
appropriate statutory language to ensure that payment for radiation 
oncology services and other similarly impacted services are not reduced 
as a result of efforts to ensure appropriate payment for medical 
oncology services.
---------------------------------------------------------------------------
    \1\ Practice expenses include the provision of facilities, 
equipment, supplies and non-physician personnel. For radiation 
oncology, these services include radiation therapy delivery, and 
services with substantial amounts of resource-intensive physicist time.
---------------------------------------------------------------------------
Background
    Medicare's method for determining payments for practice expenses 
for physicians' services is extremely complex. In addition to the 
specialty-specific payment ``pools'' that exist under the Medicare 
payment system, there is a pool reserved for a group of technical 
component-only services (i.e. services for which there is no physician 
work component) provided by a number of different specialties. Many of 
the medical oncologists' procedures reside in this so-called ``zero 
work pool'' (``ZWP''), along with other capital-intensive procedures 
for specialties such as radiation oncology, diagnostic radiology, 
cardiology and others. In 2002, services in the ZWP experienced a 4-6% 
cut in practice expense payments due to relatively minor shifts in the 
mix of services shown in the utilization data. These cuts, combined 
with the 5.4% cut in the conversion factor for 2002, equaled a 10% or 
greater loss in reimbursement for those services. Since publication of 
the 2002 Physician Fee Schedule, we have worked with other specialties 
and with the Centers for Medicare & Medicaid Services (``CMS'') to 
determine why these losses occurred, and to ensure that similar cuts do 
not occur again in the future.
    It is our understanding that Congress may consider changing the way 
that drugs, including chemotherapy drugs, are reimbursed. In addition, 
we understand that the practice expense payment methodology for 
chemotherapy administration is being examined. Related to this review 
is a proposal for modifying the practice expense payment methodology 
for chemotherapy administration. This proposal, if adopted, would 
effectively remove chemotherapy administration from the ZWP. As 
previously stated, the mix of services in the pool, which changes based 
on each year's utilization data, significantly affects the amount of 
money allocated to the entire pool. Since chemotherapy administration 
is among the most frequently performed services in the ZWP, the removal 
of these services would have a significant, negative impact on the 
remaining specialties in the pool.
Request for Congressional Assistance
    For radiation oncology, technical component services are the 
foundation of our work. In addition to physician planning and 
management, the care we provide to cancer patients is heavily dependent 
on the skilled services of medical physicists, dosimetrists and 
radiation therapists, whose codes in the ZWP have been hit especially 
hard. The decreased Medicare payments--compounded by decreases from 
many insurers that base their payments on the Medicare Fee Schedule--
will adversely affect our ability to maintain critical staff and to 
provide therapy using the advanced technology that is now available. In 
the long term, without sufficient practice expense reimbursement, 
future research and development will slow as device manufacturers see 
that their customers are unable to afford their products. The net 
effect of all these cutbacks will be reduced access to quality care by 
cancer patients. These problems must not be exacerbated by inadvertent 
reductions that could result from revisions in payment methodology for 
medical oncology services.
    ASTRO requests that if Congress decides to enact legislation that 
addresses the practice expense payments for chemotherapy 
administration, that it do so in a manner that protects the practice 
expense payments for all medical services remaining in the ZWP, 
including radiation oncology, from further inappropriate reductions.

                               

    Chairman JOHNSON. The hearing is adjourned.
    [Whereupon, at 12:49 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

           STATEMENT OF THE AMERICAN ASSOCIATION FOR HOMECARE

    The American Association for Homecare (AAHomecare) submits the 
following testimony on the Pricing Mechanisms for Drugs Covered Under 
the Medicare Program to the Subcommittee on Health of the Committee of 
Ways and Means. AAHomecare represents home health agencies and 
suppliers of durable medical equipment (DME), supplies and services. 
AAHomecare members represent every segment of the homecare community, 
including suppliers that furnish infusion and inhalation therapies to 
Medicare beneficiaries in their homes.
    Under the Balanced Budget Act (BBA) of 1997, Congress established 
payment for Medicare covered drugs at 95% percent of the average 
wholesale price (AWP) for the drug. A drug's AWP is set by the 
manufacturer and published in compendia of drug prices produced by a 
number of companies. Medicare carriers use the prices published in the 
compendia to calculate drug payments. This payment methodology has been 
criticized recently because there can be a wide spread between the 
drug's AWP and the price a physician or supplier pays to acquire the 
drug. While AWP may not be an ideal methodology for Medicare Part B 
drug payments, AWP payments for the drugs used in home infusion and 
home inhalation therapies cover the cost of services necessary to 
furnish these therapies safely and effectively in the home. Because 
Medicare does not otherwise reimburse suppliers for the costs of these 
services, this payment system has permitted beneficiaries to receive 
quality infusion and inhalation therapies in their homes.
    Current Medicare policy limits payment for infusion and inhalation 
therapies to what is covered and paid for under the DME benefit. This 
means that the Medicare program does not explicitly reimburse homecare 
pharmacies for the array of services necessary to furnish these 
therapies safely and effectively to patients in their homes. This is in 
contrast to the way private sector health plans typically define and 
pay for these therapies. Typically, private sector plans make separate 
payments for the drug and non-drug components of the therapy. The 
private sector has embraced home infusion and inhalation therapies, 
recognizing the patient care benefits and significant savings that 
accrue from moving care to non-acute settings and preventing otherwise 
predictable hospitalizations.
    A change in the way Medicare pays for covered drugs will require a 
corresponding change in how these medically necessary services and 
functions are paid for. Trimming drug payments back without providing 
for separate payment for those activities that, until now, have been 
subsidized by the drug payment would be an unwise policy that may have 
potentially grave consequences for Medicare beneficiaries.
LA Revision To AWP Drug Payments Must Include Payment For The Service 
        Costs Of Furnishing Inhalation And Infusion Therapies To 
        Beneficiaries In Their Homes
    There is no question that there can be a large spread between the 
AWP and acquisition costs of drugs used in homecare. However, the 
acquisition cost of the drug is only a small part of the costs that 
homecare pharmacies incur in furnishing inhalation and home infusion 
therapies to Medicare beneficiaries in their homes. Medicare policy 
limits coverage and payment for these therapies to only the drugs, 
equipment, and supplies that are used in the therapy. In actuality, 
however, inhalation and infusion therapies furnished to patients at 
home involve far more than simply the delivery of drugs, supplies, and 
equipment to a patient. Provided safely and properly, these therapies 
require an array of services and ancillary functions provided by 
trained health professionals. While not separately paid for by the 
Medicare program, these services and functions are reimbursed in large 
part through the payments for the drugs, supplies, and equipment. The 
drug payment in particular subsidizes these services and functions.
    In 2001, the American Association for Homecare commissioned a study 
by the Lewin Group, ``Product and Service Cost of Providing Respiratory 
and Infusion Therapies to Medicare Patients in the Home.'' The study 
included statistically valid data from 19 homecare pharmacies of 
varying sizes and geographic locations. The Lewin study found that the 
acquisition cost of drugs used in inhalation and infusion therapies 
represented only 26 percent of the total costs of caring for Medicare 
beneficiaries. The remaining 74 percent of the total costs were 
comprised of clinical and administrative labor, billing and collection 
costs, indirect or overhead costs, inventory/warehouse/delivery 
expenses and bad debt. These functions and costs clearly are subsidized 
by the drug payment.
    Importantly, these staff and administrative expenses are legitimate 
clinical and operating costs that are generally recognized by Medicare 
for providers in other care settings. Direct patient services for home 
infusion and inhalation therapies include patient evaluation and 
monitoring and compounding and dispensing drugs and solutions. These 
therapies require specialized pharmacy services, and pharmacies must 
have staff available to respond to emergencies and questions regarding 
therapy. Pharmacies also provide training and education to the patient 
(and often the patient's family). Inhalation and infusion 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 the administration of the 
pharmaceuticals, and general monitoring of the patient's health status. 
The pharmaceuticals, equipment, and supplies are delivered to the 
patient's home. Finally, staff, including licensed pharmacists, 
pharmacy technicians, respiratory therapists, and registered nurses are 
on call 24 hours a day. We describe these patient care services and 
administrative expenses more fully below.
LDirect Patient Services For Home Infusion And Inhalation Therapies
Patient Evaluation
    Initial patient intake is an important component for both 
inhalation and infusion therapies. The pharmacy must collect 
information on the clinical status of the patient and assess the 
potential for drug interactions. For home infusion and inhalation 
therapies, the patient evaluation is usually based on clinical 
information obtained from the nurse's assessments, communications with 
the physician and patient, the physician's orders, analysis of 
laboratory test results and other pertinent clinical information. 
Sometimes, the pharmacist will visit an infusion therapy patient, 
particularly if he or she has the appropriate clinical training and 
experience.
    As therapy proceeds, the pharmacist's findings and recommendations 
are communicated at intervals to the physician, nurse, and other 
professionals involved in the care of the patient. Interdisciplinary 
communication occurs at team conferences and as needed throughout the 
course of home treatment. Detailed information about the patient's 
compliance with and response to the prescribed treatment regimen is 
documented in the database the pharmacist maintains for each patient. 
Therapy goals are updated periodically and modifications are 
communicated to other caregivers. The pharmacist also obtains 
laboratory and other data on the patient from the physician or other 
sources and adds these data to the clinical monitoring file on the 
patient.
Compounding and Dispensing Drugs and Solutions
    Before filling an order for an infusion or inhalation patient, the 
pharmacist gathers information about the patient's medical history, 
reviews and updates the patient's medication profile, examines the 
attending physician's orders for new or continuing prescriptions, 
prepares computations needed for processing orders for drugs or 
equipment, and, if necessary, telephones the patient to answer 
questions and schedule deliveries.
    Home infusion drugs and solutions must be prepared under 
environmentally controlled conditions, as mandated by various 
regulatory and accreditation agencies. Sterile admixtures are prepared 
in a Class 100 clean air environment, using aseptic techniques. Final 
documents are subject to routine quality control procedures designed to 
insure the accuracy of the preparations, product integrity, and 
sterility. Depending on the pharmacy's volume of business and 
applicable legal restrictions, trained pharmacy technicians may prepare 
drugs under a pharmacist's supervision.
    Each patient's prescription is filled in quantities and at 
intervals sufficient for continuous service. Frequency of drug 
preparation depends on several factors, including expected duration of 
treatment, frequency of dose administration, home delivery schedules, 
drug stability or shelf-life, and patient stability. The average time 
required to compound, dispense, assemble, and package a patient's order 
depends, in part, on the number of doses in an order, the quantity of 
each dose, the number of compounded doses per delivery, the volume and 
number of ingredients and the complexity of compounding.
    An order for a medication may be filled in single or multiple 
doses. Where the patient base is large, a pharmacy technician may 
perform related tasks under a pharmacist's supervision, if state law 
permits. If a pharmacy's volume is small, the pharmacist typically 
performs all tasks needed to compound and dispense drugs.
Patient Monitoring
    Appropriate clinical monitoring is essential to ensure the safe 
administration of home infusion and inhalation drugs. With respect to 
inhalation therapies in particular, monitoring patient compliance is 
essential to achieve therapeutic effectiveness. Homecare pharmacies 
maintain ongoing programs to oversee patients' compliance and to ensure 
that patients receive appropriate refills of their prescriptions.
    As with any other type of medical care, complications may result 
from infusion therapy. If these complications are not recognized and 
addressed in a timely manner, serious injury and even death may occur. 
Ongoing clinical monitoring is therefore essential to minimize or 
prevent complications associated with infusion therapy and to optimize 
desirable outcomes. Nurses and pharmacists must be adept in identifying 
the signs and symptoms of the infectious, metabolic, physiological, and 
psychosocial complications that can occur, and in managing them.
    Throughout the course of therapy, and particularly after a nursing 
visit, the pharmacist reviews an infusion patient's clinical 
information collected by the nurse, discusses the findings with the 
attending physician, assesses the continuing appropriateness of the 
current medication schedule, participates in multidisciplinary patient 
care conferences to examine the patient's progress and to establish 
future goals, and communicates with the patient's other caregivers 
regarding the patient's compliance and progress. Clinical monitoring 
activities also include establishing testing and monitoring schedules, 
reviewing laboratory findings, evaluating any identified problems that 
may have occurred, and developing corrective action plans.
LAdministrative And Support Services For Home Infusion And Inhalation 
        Therapies
    There are significant direct and indirect administrative and 
support services that impact the quality of patient care. Home infusion 
and inhalation therapies cannot be coordinated and delivered 
effectively without adequate administrative and support personnel. Many 
of these requirements are established by licensing boards, accrediting 
bodies, private insurance plans, and Federal and state health programs. 
Other activities are simply part of managing and operating any health 
care entity. Examples of administrative and support services include 
quality improvement programs, utilization review, medical records 
management, coordination of insurance benefits, claims processing, 
medical waste management, personnel management, inventory control, 
orientation programs for new employees, and clinical development and 
education programs for management and staff.
    Accreditation, for example, is an indirect cost that affects the 
quality of care delivered by homecare suppliers and providers. 
Accredited companies must meet quality standards for patient care and 
business functions in order to maintain accreditation. Accreditation 
offers the public the assurance that an accredited company meets or 
exceeds an objectively verifiable standard of care. It will be a 
setback for Medicare beneficiaries if Medicare reimbursement does not 
adequately reimburse providers and suppliers for the cost of meeting 
quality standards. If accreditation costs are ignored by Medicare, 
Medicare beneficiaries will receive a lower standard of care than 
individuals enrolled in private sector health plans. In addition to 
accreditation, there are costs associated with complying with state 
licensure and professional board requirements.
    Homecare pharmacies also incur significant costs in complying with 
Medicare program rules, especially those pertaining to billing and 
documentation. These include, among others, the following:

         Accumulating documentation to support claims for 
        services
         Preparation of claims
         Communication with physicians regarding completion of 
        certificates of medical necessity and other documents required 
        by the program of physicians.
         Communication with carriers regarding claims and 
        documentation
         Participating in medical review process with carriers 
        on particular claims
         Delays in payment from the program

    It is worthwhile to note that both the General Accounting Office 
(GAO) and the Office of Inspector General (OIG) for the Department of 
Health and Human Services have acknowledged that the costs of complying 
with Medicare program rules are higher than the costs of compliance for 
other government and private payers \1\ In a comparison of payments for 
home oxygen therapy by Medicare and the Veterans Administration (VA), 
the GAO concluded that Medicare's documentation and other 
administrative requirements warranted a 30% higher payment for oxygen. 
The GAO also acknowledged that CMS must account for the costs of the 
services necessary to furnish Medicare covered items when performing 
inherent reasonableness reductions. Similarly, the OIG concluded that 
the higher costs of complying with Medicare program rules could justify 
charging Medicare more than other private or government payers.
---------------------------------------------------------------------------
    \1\ Letter dated May 15, 1997, Re: Comparison of Medicare and VA 
Payment Rates for Home Oxygen, from William Scanlon, Director, Health 
Financing and Systems Issues, GAO to William Roth, Chairman Committee 
on Finance, United State Senate; Medicare Payments Use of Revised 
``Inherent Reasonableness'' Process Generally Appropriate, GAO/HEHS-00-
79, July 2000; OIG Advisory Opinion 98-8.
---------------------------------------------------------------------------
LUtilization For Drugs Used In Inhalation Therapies Is Directly Related 
        To The Increase In The Number Of Patients With Chronic 
        Obstructive Pulmonary Disease (COPD)
    It has been suggested that the increase in the utilization of drugs 
used in inhalation therapies is related to the difference between the 
drugs' acquisition costs and the AWP for the drugs. It is important to 
remember that physicians--not homecare pharmacies--prescribe these 
medications. It is likewise crucial to consider the broad demographics 
of the patient population that receives these drugs.
    Patients who require inhalation therapy suffer from chronic 
obstructive pulmonary disease (COPD). According to a report recently 
released by the National Institutes of Health \2\, COPD is the fourth 
leading cause of death in the United States, and, of all leading causes 
of death in the United States, the incidence of COPD continues to rise. 
Death rates from COPD increased 22% in the last ten years. The number 
of patients with COPD doubled in the last 25 years, along with expenses 
related to the disease. Between 1985 and 1995, for example, the number 
of physician visits for COPD increased from 9.3 million to 16 million. 
The number of hospitalizations for COPD in 1995 was estimated to be 
500,000. Medical expenditures for COPD in 1995 amounted to $14.7 
billion.
---------------------------------------------------------------------------
    \2\ GOLD Initiative For Chronic Obstructive Pulmonary Disease, 
April 2001.
---------------------------------------------------------------------------
    Inhalation drug therapy plays a critical role in the management and 
stabilization of COPD. COPD patients are diagnosed earlier and placed 
on these medications sooner to stabilize their symptoms and, as a 
result, reduce other medical expenses, such as repeat hospitalizations 
and physician visits, that are associated with the disease. The use of 
two respiratory medications, Ipatropium Bromide and Albuterol Sulfate, 
individually and in combination are widely supported in the clinical 
literature. The costs of treating these patients with inhalation 
therapy are modest, especially in light of the potential for a 
reduction of other health care expenses for this population.
    Finally, respiratory drugs are for a chronic, ultimately fatal 
illness that requires daily drug therapy to help people with COPD avoid 
exacerbations. Many of these individuals remain on these medications 
for the remainder of their lives. As COPD progresses, the number of 
treatments per patient increases, accounting for the higher volume for 
these drugs.
Conclusion
    A comprehensive analysis of the services necessary to safely 
furnish inhalation and infusion therapies to beneficiaries in their 
homes must be part of any proposal to revise drug payments. Medicare 
payment for covered drugs should not be changed without providing a 
mechanism for Medicare to cover and pay for those services. For any 
reduction in payment for covered drugs, there must be a corresponding 
payment for the services required to furnish inhalation and infusion 
therapies in the home. We remain willing to work with Congress and the 
Centers for Medicare and Medicaid Services to develop an appropriate 
mechanism to accomplish this important objective. For additional 
information, contact Asela M. Cuervo, 703-836-6263.
                               

           Statement of the American College of Rheumatology

Introduction
    The American College of Rheumatology (ACR) is an organization of 
physicians, health professionals, and scientists that serves its 
members through programs of education, research, and advocacy that 
foster excellence in the care of people with arthritis, rheumatic and 
musculoskeletal diseases. Arthritis means swelling, pain and loss of 
motion in the joints of the body. There are more than 100 rheumatic 
diseases that cause this condition that can sometimes be fatal--in both 
children and adults of all ages. These chronic diseases cause life long 
pain and disability.
    Arthritis is the leading cause of disability in the United States, 
affecting approximately forty-three million Americans. Arthritis has 
been found to rank first among the ten leading health problems of 
individuals age 50 and older. By the year 2020, the prevalence of 
arthritis will increase to an estimated 60 million Americans. The 
provision of care to people who are disabled contributes significantly 
to the financial costs paid by the government, private insurers, and to 
society as a whole. More than $65 billion are spent yearly due to 
medical costs and lost productivity associated with arthritis and 
related diseases each year.
    ACR appreciates the opportunity to provide written testimony to the 
Ways and Means Health Subcommittee, and our organization is available 
as resource to the Subcommittee as it continues its review of the 
issues surrounding the current pricing methodology for Medicare Part B 
covered drugs and the possible downstream effects of reform in this 
area. The College's testimony will discuss the potential impact of 
pricing revisions that are implemented without corresponding 
adjustments accounting for the costs of administering these services. 
Within that framework, the focus of our testimony will be the 
profoundly life-improving infusion therapy services provided by 
rheumatologists to many Medicare beneficiaries with arthritis and 
related diseases.
Discussion
    The College emphatically believes that physicians should be 
adequately reimbursed by Medicare and private payers to a degree that 
covers all costs associated with care and allows for reasonable payment 
to physicians, in keeping with the underlying philosophy of the 
resource-based relative value system that is the basis for 
reimbursement in the Medicare program. However, current reimbursement 
levels for infusion therapy services are based on pre-1998 data. 
Therefore, reimbursements for newer therapies often do not reflect the 
complexity, risks, and true practice expenses associated with their 
administration. The lack of adequate compensation will only increase as 
additional biologics complete clinical trials and are approved for use.
    In the current payment methodology, the College recognizes that 
payments to physicians for the purchase and administration of drugs 
subsidize physician practices in many cases where adequate practice 
expenses are not being reimbursed. Much of the current debate relates 
specifically to infusion therapies.
    A change to the drug reimbursement policy that does not reflect the 
needs of practitioners to meet their costs and receive reasonable 
compensation for their services will force some physicians to stop 
offering infusion services to Medicare patients, which will limit 
patients' access to valuable, life-affecting therapies. If physicians 
cannot offer these therapies, patients may be referred to hospitals and 
academic medical centers--institutions that may not be equipped to 
handle the increased demand and to whom significantly higher 
reimbursements will be provided through Medicare.
    Further, the College is concerned that proposed methodological 
adjustments intended to address shortfalls in practice expense 
reimbursement subsequent to the implementation of pricing revisions may 
be directed toward specific specialties or categories of services. We 
therefore urge Congress to examine the entire universe of disease 
groups and specialties that might be affected by such methodological 
revisions to ensure that broad categories of patient populations and 
provider groups, such as those with arthritis and related diseases and 
the rheumatologists who treat them, are not adversely affected by such 
a change.
Recommendations
    In recognition of these facts, and for the overall purpose of 
assuring that patients will continue to have access to the best 
available therapies, the College believes that policymakers in Congress 
within the Ways and Means Health Subcommittee and beyond should:
         Aggressively support those payment methodologies that 
        allow physicians to be paid at a reasonable level for their 
        services;
         Oppose payment methodologies that rely on outdated or 
        incomplete data to calculate reasonable payment levels;
         Advocate for coverage of all competitive treatment 
        methodologies, regardless of their route or frequency of 
        administration;
         Ensure that any methodological revisions apply to all 
        affected disease groups and specialties.
Conclusion
    The ACR commends the Ways and Means Health Subcommittee for 
addressing issues surrounding the quality of care delivered to Medicare 
beneficiaries, with particular emphasis on patients with arthritis and 
related diseases. We appreciate the opportunity to provide input to 
your efforts, and look forward to working collaboratively with the 
Congress to advance the goal of comprehensive health care delivery 
within the Medicare program and appropriate and fair payment for 
Medicare providers.
                               
 Statement of Timothy M. Bateman, M.D., Chairman, Government Relations 
    Committee, American Society of Nuclear Cardiology, Kansas City, 
                                Missouri
    The American Society of Nuclear Cardiology (ASNC), a 4,500 member 
professional society dedicated to education and quality clinical 
excellence in the delivery of nuclear cardiology services, is pleased 
to submit its views on proposals to revise Medicare's payment 
methodology for drugs being considered by the Ways and Means Health 
Subcommittee.
    ASNC believes that solutions proposed for reforming practice 
expense reimbursement in administering cancer drugs may have an 
unintended, extremely severe adverse impact on continued patient access 
to many important services. The Society is particularly concerned that 
many patients who need diagnostic tests for cardiovascular disease may 
not receive those tests resulting in the unnecessary expenditure of 
millions of dollars at a later date. Heart disease remains the leading 
killer of both men and women. Testing by nuclear cardiologists to 
ascertain the existence of cardiovascular artery disease has led to 
reduced incidences of death from heart disease. This progress could be 
reversed by unwise legislative decisions. The Society is particularly 
concerned that while the subcommittee corrects one problem, it could 
create unintended burdens for many specialties including nuclear 
cardiology. ASNC requests that the Ways and Means Health Subcommittee 
include statutory language in any legislation it approves related to a 
readjustment of practice expense payments to physicians that would 
ensure that payments for services with no physician work component 
(``Zero Work Pool'' services) are not reduced as a result of the 
subcommittee's action related to the adjustment of practice expense 
payments for medical oncology services.
    Medicare's method for determining payments for practice expenses 
for physicians' services is extremely complex. In addition to the 
specialty-specific payment ``pools'' that exist under the Medicare 
payment system, there is a pool reserved for a group of technical 
component-only services (i.e. services for which there is no physician 
work component) provided by a number of different specialties. Many of 
the medical oncologists' procedures reside in this so-called ``Zero 
Work Pool'' (ZWP), along with other capital-intensive procedures for 
specialties such as diagnostic radiology, radiation oncology, nuclear 
cardiology, nuclear medicine, echocardiography, and others. In 2002, 
services in the ZWP experienced a 4-6 percent cut in practice expense 
payments due to relatively minor shifts in the mix of services shown in 
the utilization data. These cuts, combined with the 5.4 percent 
reduction in the conversion factor for 2002, equaled a 10 percent or 
greater loss in reimbursement for those services. Since publication of 
the 2002 Physician Fee Schedule, specialties affected by these cuts 
have worked together, and with the Centers for Medicare & Medicaid 
Services (CMS), to determine why the losses occurred, and to ensure 
that similar cuts do not occur again in the future.
    Today's hearing examines proposals for changing methodologies of 
reimbursing chemotherapy drugs and practice expense payment methodology 
for chemotherapy administration. Should the subcommittee modify the 
practice expense payment methodology for chemotherapy administration, 
clinical oncology services could be removed from the ZWP. This 
modification potentially could have a devastating impact on those 
specialties that remain in the ZWP. The mix of services in the pool 
which changes based on each year's utilization data, significantly 
affects the amount of money allocated to the entire pool. Since 
chemotherapy administration is among the most frequently performed 
services in the ZWP, the removal of these services would have a 
significant negative impact on the remaining specialties in the pool.
    Technical component services are the foundation of many of the 
specialties in the ZWP. The decreased Medicare payments--compounded by 
decreases from many insurers that base their payments on the Medicare 
Fee Schedule--will adversely affect the ability to provide care using 
the newest and most advanced technology to detect CAD that is now 
available. In the long term, without sufficient practice expense 
reimbursement, future research and development will slow as 
pharmaceutical and device manufacturers see that their customers are 
unable to afford their products. The net effect of all these cutbacks 
will be reduced patient access to quality care. These problems must not 
be exacerbated by inadvertent reductions that could result from 
revisions in payment methodology for medical oncology services.
    The American Society of Nuclear Cardiology requests that should the 
Ways and Means Health Subcommittee address practice expense payments 
for chemotherapy administration legislatively, that it do so in a 
manner that protects the practice expense payments for all medical 
services remaining in the ZWP from further inappropriate reductions.

                               
      Statement of Peter Blitzer, M.D., President, Association of 
                Freestanding Radiation Oncology Centers
    My name is Dr. Peter Blitzer, and I am the President of the 
Association of Freestanding Radiation Oncology Centers (AFROC). We are 
a national association representing over 150 freestanding radiation 
oncology centers throughout the country, dedicated to the conduct of 
high quality radiation oncology services in non-hospital settings. On 
behalf of our members, I would like to thank Chairman Nancy Johnson, 
Ranking Member Pete Stark, and the entire Ways & Means Health 
Subcommittee for allowing AFROC to submit this testimony concerning the 
issue of the Medicare program's use of average wholesale price (AWP) in 
determining reimbursement rates for prescription drugs, particularly as 
it relates to the field of medical oncology.
    AFROC is concerned that certain proposals in Congress aimed at 
revising Medicare reimbursement rates for practice expenses associated 
with the administration of oncology drugs by medical oncologists may 
have an unintended and disproportionate impact on radiation oncology 
services provided in freestanding centers to cancer patients. We 
request that, in implementing and enacting legislation aimed at 
changing current reimbursement policies in this area, Congress include 
appropriate statutory language to ensure that radiation oncology and 
other highly capital intensive services are not subjected to unintended 
consequences that may arise from the effort to ensure appropriate 
payment for medical oncology services.
    Medicare payments for practice expenses associated with the 
provision of radiation oncology, medical oncology, and other highly 
resource intensive services (``technical component services'' \1\) are 
reimbursed under the Physician Fee Schedule and are subject to a 
special payment methodology--the ``zero work pool'' (ZWP) methodology. 
The ZWP methodology essentially groups all technical component and 
certain other services into the same ``pool'' for Medicare payment 
purposes. Due to the structure of the overall ``pool'' of services, 
should Congress seek to modify the reimbursement methodologies for some 
of the services in the ``pool'' (e.g., chemotherapy administration), 
such a modification could potentially have an unintended impact on 
other ZWP services (e.g., radiation oncology technical component 
services).
---------------------------------------------------------------------------
    \1\ ``Technical component services'' are comprised of the provision 
of facilities, equipment, supplies, and non-physician personnel. These 
services differ from ``professional component services,'' which are 
primarily comprised of physician work.
---------------------------------------------------------------------------
    A case in point is this year's Medicare payment levels for ZWP 
services, which were reduced by approximately 4% as a result of 
relatively minor adjustments in the ``mix'' of services in the pool. 
Because of this reduction, budget neutrality adjustments, and the 5.4% 
reduction in the Medicare conversion factor, Medicare payment for 
radiation oncology technical component services was reduced by a 
devastating 9%-12% this year. AFROC has been working with the Centers 
for Medicare & Medicaid Services to ensure that any future adjustments 
to the utilization ``mix'' in the ZWP do not result in further 
unintended payment reductions for technical component services.
    It is our understanding that Congress is currently considering 
modifying the Medicare payment methodology for reimbursing medical 
oncologists and others for drugs furnished ``incident to'' physician 
services. In conjunction with its consideration of this issue, it is 
also our understanding that Congress is considering whether medical 
oncologists who administer oncology drugs in their offices are 
appropriately reimbursed for their practice expenses. Indeed, proposals 
already have been made to significantly modify the methodology used to 
determine payment for medical oncologist's practice expenses.
    AFROC is not in a position to comment on Medicare payment for 
oncology drugs or the cost of administering these drugs. However, AFROC 
is concerned that if chemotherapy administration services are removed 
from the ZWP methodology or if other steps are taken to establish a 
special payment methodology for these services, there may be a 
significant, unintended and disproportionate impact on radiation 
oncology and other services that remain in the ZWP.
    As freestanding radiation oncology centers have already discovered 
this year, even relatively minor adjustments in the ``mix'' of ZWP 
services can dramatically affect Medicare payment levels for all 
services in the pool. Since chemotherapy administration services are 
among the most frequently performed services in the pool, any 
adjustment to the payment methodology applicable to these services may 
have an extraordinary impact on radiation oncology and other ZWP 
services, unless CMS is directed to implement any modifications in the 
payment methodology applicable to chemotherapy administration in a 
manner that does not have a disproportionate impact on ZWP services.
    To that end, AFROC requests that if Congress pursues legislation 
aimed at addressing the practice expenses of medical oncologists for 
the administration of oncology drugs, it do so in a manner that does 
not disproportionately affect radiation oncology or other ZWP services. 
In the event that such legislation is pursued, AFROC would welcome the 
opportunity to work with you to craft appropriate statutory language 
that meets the goals of your policy objectives while guarding against 
any unintended consequences that may arise.

                               
   Statement of the National Alliance for Infusion Therapy, and the 
        National Home Infusion Association, Alexandria, Virginia
    The National Alliance for Infusion Therapy (NAIT) and the National 
Home Infusion Association (NHIA)--representing providers and 
manufacturers of home infusion drug therapy supplies, equipment and 
services--submits this statement for the hearing record for 
consideration by the Subcommittee of Health.
Home Infusion Drug Therapy
    Home infusion drug therapy involves the administration of a drug 
through a needle or catheter. Typically, infusion drug therapy involves 
the full clinical management of patient care for those who require a 
drug therapy that is administered intravenously. It may also involve 
situations where drugs are provided through other parenteral (non-oral) 
routes. Infusion drug therapies are used only when less invasive means 
of drug administration are clinically unacceptable or less effective. 
Medications are administered by infusion only upon the prescription of 
a treating physician.
    A team of clinical pharmacists, high-tech infusion nurses, patient 
service representatives and delivery and reimbursement professionals 
support patients and their caregivers throughout the treatment process. 
The services provided by the team are inextricably linked to the 
therapies and are often mandated by accrediting bodies whose standards 
ensure quality of care outside of the hospital setting, as well as by 
the professional standards of practice of the American Society of 
Health-System Pharmacists and the Intravenous Nurses Society. Due to 
the extremely sensitive and invasive nature of infusion therapies, the 
standards of practice are some of the most rigorous in the practice of 
pharmacy and nursing.
    This high level of practice standards is also echoed in the 
facility requirements for the provision of home infusion drug 
therapies. Home infusion drug therapies must be prepared in high-tech, 
stringently controlled environments. Due to the nature of these 
therapies, in many cases the quality assurance standards even exceed 
hospital inpatient facility standards for preparation of intravenous 
medications.
    In short, the professional pharmacy services, supportive staff 
infrastructure and practice expenses required to ensure the safe and 
effective administration of infusion therapies are extensive. Despite 
this extensive clinical infrastructure, home infusion drug therapy 
provides a safe, patient-preferred and extremely cost-effective 
alternative to inpatient treatment.
Medicare Coverage and Payment for Home Infusion Drug Therapy
    Providers and suppliers of infusion drug therapies in the home 
setting are not paid separately by Medicare for the critical services 
and practice expenses described above. Medicare does not have a 
separate benefit for infusion therapy, but instead, infusion drugs 
provided in the home setting are covered exclusively under Medicare's 
benefit for durable medical equipment. The only items that are 
explicitly covered and reimbursed under this limited benefit are the 
drugs, equipment and supplies. Unlike other health care professionals 
who administer infusion and injectable drugs currently covered under 
Medicare Part B, providers and suppliers of home infusion drug 
therapies do not have a mechanism under Medicare that provides them 
with reimbursement for the services and facilities necessary to provide 
these therapies.
    This is an extremely important point for policymakers to consider 
as they seek to reform outpatient drug reimbursement. Since the 
Medicare program does not explicitly reimburse pharmacists for their 
practice expenses and professional services (including such home 
infusion services as compounding), pharmacists currently are ``paid'' 
for these costs and functions primarily through reimbursement for the 
drugs. Similarly, Medicare does not explicitly pay for nursing services 
provided by infusion therapy providers. A nurse performs many 
functions, including patient screening and assessment, patient training 
regarding administration of the pharmaceuticals and general monitoring 
of the patient's health status. To the extent that Medicare reimburses 
for such services, it is largely through the drug payment. As explained 
in greater detail below, reductions in drug payments must be 
accompanied by a contemporaneous re-allocation of payment for these 
necessary professional services. If drug payments are reduced 
drastically without such a re-allocation, Medicare beneficiaries will 
not be able to receive home infusion drug therapy because the costs of 
therapy will exceed by a large margin the available reimbursement for 
the therapy.
    It is important to emphasize that none of the specialized pharmacy 
services are 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 might be covered under that 
benefit. For all other Medicare home infusion patients, the nursing 
services are not covered by the home health benefit. Likewise, the home 
health benefit does not cover the provision of drugs.
    In contrast to Medicare, private sector insurance plans and private 
managed care plans have embraced home infusion drug therapy over the 
course of the last two decades, and commercially insured patients 
represent 70 to 80 percent of home infusion drug therapy patients. The 
private managed care community has recognized that infusion therapy 
administered in the home is a tremendous source of cost-savings, and 
the private sector provides coverage for a growing list of infusion 
therapies.
    Private sector health plans and payers typically recognize the 
professional services and practice expenses necessary to provide 
infusion drug therapy in the outpatient setting through a separate 
``per diem'' reimbursement that is paid for each day the patient is 
receiving therapy. This per diem payment is made in addition to the 
cost of the drug and nursing visit.
    As home infusion drug therapy has become a staple of major medical 
coverage in the private sector, Medicare's refusal to see these 
therapies as anything other than the delivery of supplies and equipment 
is crossing a line from poor policy to surreal. Despite the 
uncontradicted and overwhelming evidence of the clinical need for these 
services, the Medicare program persists in defining these multifaceted 
drug therapies as requiring no greater effort than is involved in the 
delivery of a walker or wheelchair. Unless Medicare's coverage of these 
therapies is brought into line with the private sector, Medicare 
beneficiaries ultimately will suffer in two important ways. If the 
provision of therapy becomes limited to what Medicare actually covers, 
then the beneficiaries will suffer from seriously reduced levels of 
care. Or, more likely, suppliers will simply cease providing care to 
Medicare beneficiaries to avoid the consequences of providing 
substandard care.
Reliance on AWP to Calculate Reimbursement
    NAIT and NHIA understand the criticism expressed by Members of this 
Subcommittee, as well as other Members of Congress, regarding the 
current practice of relying on average wholesale price (AWP) as a basis 
for calculating Medicare and Medicaid outpatient drug reimbursement. 
The imperfections of the AWP methodology are well-known and extensively 
documented.
    It should be noted that the September 2001 General Accounting 
Office study highlighted that home infusion therapies represent only a 
small percentage of current Medicare Part B drug expenditures. As a 
result, the GAO ``did not analyze the costs of infusion therapy drug 
provided in the home setting because they do not account for a 
substantial share of Medicare drug spending or volume.''
    For the reasons stated above, at the present time the drug payments 
for infusion therapy subsidize other functions that the Medicare 
payment methodologies do not reflect appropriately. The costs of these 
services and functions far outweigh the costs of the drug product, but 
these costs are clearly lower than the charges that would be incurred 
if the patient received treatment in an alternate setting. For home 
infusion drug therapy, the drug payment is the only available payment 
mechanism for the services that are essential to providing good quality 
care. The long-standing use of AWP to determine reimbursement has 
masked the failure of Medicare and Medicaid payment policies to define 
and account for the service component.
    If changes to the methodology used to calculate drug reimbursement 
result in substantially reduced drug payments, without corresponding 
changes to ensure adequate reimbursement for the service component of 
providing infusion therapies, the end result will virtually guarantee 
an inability of providers to continue to provide these services. 
Without the availability of home infusion services, Medicare 
beneficiaries will be treated in more costly settings.
Recommendations
    We urge Congress to recognize the need for a meaningful analysis of 
all of the drugs, items, professional services, and facility 
requirements necessary to provide various types of drug therapies to 
beneficiaries in a manner that is consistent with the standard of care 
in this country and private accreditation standards. To restrict the 
analysis to the difference between drug acquisition cost and Medicare 
reimbursement is to examine only one small piece of the equation. Such 
a narrow analysis would fail to meet the overarching goal of using 
Medicare resources as judiciously as possible.
    Before instituting drug payment reform, Medicare must accurately 
define infusion therapy and create quality standards based on the 
standards currently and widely used in the private sector. Medicare 
should then establish a fee schedule that reflects all the covered 
components of the therapies to accompany the AWP-based drug payment 
changes.
    We look forward to working cooperatively with the Subcommittee to 
explore solutions that are in the best interests of the financial 
integrity of the Medicare program, as well as the best interests of the 
health care needs of the Medicare beneficiaries that rely on home 
infusion drug therapies.

                                 

                                           Oncology Nursing Society
                                Pittsburgh, Pennsylvania 15275-1214
                                                   October 13, 2002
The Honorable Nancy Johnson
Chair
Health Subcommittee
House Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

    Dear Chairwoman Johnson:

    On behalf of the Oncology Nursing Society (ONS)--the largest 
professional oncology group in the United States composed of more than 
30,000 nurses and other health professionals dedicated to ensuring 
access to quality care for people with cancer--we are writing to submit 
this letter as written testimony to be included in the record of your 
recent hearing on ``Medicare Payments for Currently Covered 
Prescription Drugs.'' We very much appreciate this opportunity to 
provide our input and stand ready to work with you, your colleagues, 
the Centers for Medicare and Medicaid Services (CMS), and others to 
address Medicare oncology and nursing payment related issues to ensure 
that Medicare beneficiaries with cancer receive quality care.
    ONS shares the concerns of Congress and CMS regarding the ongoing 
viability of the Medicare program and recognizes the need to take steps 
now to preserve access to care for all beneficiaries with cancer. In 
the attached ``principles'' document, you will see that ONS--along with 
seventeen of our partner organizations in the cancer community--has 
endorsed Representative Jim Greenwood's principles for Medicare 
``reform'' of the current Average Wholesale Price (AWP) system of 
payment for Medicare reimbursable prescription drugs. ONS feels 
strongly that the Medicare program should neither overpay nor underpay 
for benefits and services. Moreover, ONS maintains that the current AWP 
payment policy unfairly results in larger co-payments for Medicare 
beneficiaries and distorts the entire cancer care payment system.
    To that end, we join you and your colleagues in calling for reform 
and advocate that Congress develop--and CMS implement--new policies 
that ensure that the full range of services provided in the provision 
of cancer care is reimbursed adequately and appropriately. The attached 
principles document--along with a joint letter (attached) sent by ONS 
with the National Patient Advocate Foundation (NPAF) to Senate Finance 
Committee Chairman Max Baucus--make clear that ONS fully supports 
reform but maintains that changes to the ``AWP system'' cannot occur at 
the expense of patient access to community-based, quality care. We feel 
strongly that reductions in drug payments should occur only 
simultaneously with commensurate increases in reimbursement for 
chemotherapy administration and associated supportive care services.
    As you know, cancer is a complex, multifaceted, and chronic 
disease, and people with cancer require specialty-nursing and clinical 
interventions at every step of the cancer experience. To that end, 
people with cancer are best served by multi-disciplinary teams of 
health care professionals specialized in oncology care, including 
nurses certified in that specialty. Approximately 4 out of 5 cancer 
care encounters occur in community settings, where oncology nurses play 
a central role in the provision of quality cancer care as they are 
principally involved in the administration and monitoring of 
chemotherapy and the associated side-effects patients may experience. 
The shift in the provision of cancer care from inpatient to outpatient, 
community-based settings has resulted in significant benefits for 
patients and savings for the health care system as a whole.
    However, despite this important change in the provision of cancer 
care, ONS believes that the current Medicare payment system fails to 
adequately recognize the reality of the current contributions made by 
oncology nursing and other clinical staff in this ``new'' outpatient 
system of care. As anyone ever treated for cancer will attest, oncology 
nurses are intelligent, well-educated, highly skilled, compassionate 
professionals who provide quality clinical, psychosocial, and 
supportive care to patients and their families. In short, they are 
integral to the cancer care delivery system. Therefore, it is essential 
that we assure that Medicare payment policies recognize the full range 
of health professionals who contribute to the delivery of quality 
cancer care to beneficiaries in need.
    In addition to updating Medicare payment for the administration of 
chemotherapy and supportive care services provided by oncology nurses 
and other health professionals, ONS urges Congress and CMS to ensure 
that the Medicare program does not unintentionally devalue the work of 
oncology nurses and other non-physician clinical staff. Specifically, 
we call upon you to eliminate the use of the term ``zero work pool'' 
for those services provided by nurses and other non-physician health 
professionals. While we realize that the actual name for services 
without physician work Relative Value Units (RVUs) is ``zero physician 
work pool,'' the vernacular used by agency and Congressional staff and 
other stakeholders is ``zero work pool.'' This nomenclature suggests 
that the work done by oncology nurses and other clinical staff is 
without value--that their work is of ``zero'' value. We understand that 
while it is not the intention of Congress or CMS to connote a zero 
value for oncology nurses' contributions, the reality is that our 
organization, our members, and others--such as oncology social workers 
and radiology technicians--take offense at its use. Moreover, in a time 
in which our country is facing a nursing shortage--the nature and scope 
of which we have never before experienced--we must make positive policy 
changes that work to elevate the visibility and express the importance 
of nursing. One of the causes of the current nursing shortage is low 
morale within the profession. Now more than ever is the time to 
highlight the range of work done by our nation's nurses, not to 
diminish it.
    Therefore, as you consider changes to the Medicare program, we urge 
that you and your colleagues take actions to ensure that the Medicare 
program better acknowledge the essential and unique role of oncology 
nurses in the provision of quality cancer care. Through official 
comments to CMS on the 2003 Physician Fee Schedule, we have asked the 
agency to rename the ``zero physician work pool'' in the final rule for 
the 2003 Physician Fee Schedule. We are advocating a title that better 
reflects the significant contributions made by nurses and other non-
physician cancer care providers in outpatient settings. We understand 
that the ``zero work pool'' may be eliminated altogether and/or 
oncology services may be pulled out from it. However, in the interim, 
while the methodology is still being used, we propose the following as 
possible appropriate alternative titles:

         Non-physician clinical staff time;
         Non-physician work components; or
         Non-physician work pool;
         Non-physician health professional pool.

    We would appreciate it if you and your committee colleagues would 
please contact CMS to voice your support of this change. We welcome an 
opportunity to discuss these or other suggested titles with you as well 
as agency staff as they review and consider modifications for the final 
rule. A change such as this would send a strong message to the oncology 
nursing community that the nation values their work. Such a step would 
help boost morale within the nursing community in a time when our 
nation is facing a nursing shortage of serious proportion.
    Again, ONS would like to express its gratitude to you and the 
Subcommittee for this opportunity to provide comments on these issues 
of priority for our organization. We believe that bringing Medicare 
payments for drugs more in line with actual costs--coupled with 
increasing and expanding practice expense payments for chemotherapy 
administration and supportive care and recognizing the contributions of 
oncology nurses--will help ensure that Medicare beneficiaries will have 
access to the quality care they need and deserve.
    If ONS can be of any assistance to the agency on these or other 
nursing or oncology matters, please do not hesitate to contact our 
Health Policy Associate, Ilisa Halpern (202/857-8968, 
[email protected]).
            Sincerely,
                                    Judy E. Lundgren, RN, MSN, AOCN
                                                          President
                                          Pearl Moore, RN, MN, FAAN
                                            Chief Executive Officer
    Attachments
                               __________
Guiding Principles: \1\
---------------------------------------------------------------------------
    \1\ These principles are the same as outlined earlier this year by 
House Energy and Commerce Oversight and Investigations Subcommittee 
Chairman Jim Greenwood.

         The system should not adversely affect patient access 
        to quality health care.
         Medicare reimbursement for drugs should be closely 
        linked to the cost of the drugs.
         Reimbursement for services should be based on actual 
        expenses.
         Drug reimbursement should not impact medical 
        decision-making.
         Payments should be equalized to ensure there is no 
        incentive to choose one setting for receiving care over 
        another.
Additional Policy Positions:

         The role of oncology nurses in the provision of 
        cancer care should be reflected explicitly in Medicare 
        legislation, statute, regulation and other policies.
         Nursing specifically should be included--and named in 
        statutes, regulations, and other policies as included 
        participants--in any policy making, policy analysis, and policy 
        review processes in which the Centers for Medicare and Medicaid 
        Services, the General Accounting Office, and other Federal 
        agencies engage with regards to Medicare reimbursement for care 
        involving the direct or indirect contribution of nurses.
         Medicare reimbursement for oncology nursing practice 
        expenses should be based on current practice data using a 
        bottom-up methodology. The Centers for Medicare and Medicaid 
        Services (CMS) should support ``work sampling'' studies and 
        incorporate the results into its practice expense calculations 
        to ensure that Medicare reimbursement is based on real costs 
        and real practice patterns.
         Changes to Medicare policy and associated 
        reimbursement must be considered in aggregate to ensure that 
        adjustments in one area do not have unintended consequences 
        with regards to patient access to quality care. The Medicare 
        program should monitor and evaluate--on an ongoing basis--the 
        impact that reimbursement policy changes have on patient 
        migration, access, and outcomes. Such tracking studies involve 
        the Agency for Healthcare Research and Quality (AHRQ), the 
        Institute of Medicine (IOM), and the Medicare Payment Advisory 
        Commission (MedPAC).
         If the CMS maintains the ``zero work pool'' 
        alternative methodology, the ``zero work pool'' should be 
        renamed to reflect more accurately the substantive 
        contributions that nurses and other non-physicians make to the 
        provision of care to Medicare beneficiaries. The current 
        nomenclature connotes a lack of value of the critical 
        contribution that nurses make and further exacerbates a 
        misconception that the work that nurses do is not quantifiable 
        or significant.
         As nursing specialty organizations typically lack the 
        resources of physician specialty groups, regulatory and 
        statutory requirements relating to public input into 
        policymaking processes should be reasonable, accommodating, and 
        flexible to ensure that nurses are not disenfranchised.
         With the current and impending shortage of nurses 
        coupled with the expected growth in cancer incidence over the 
        next two decades, all Medicare policy and reimbursement must be 
        crafted with the goal of preserving and strengthening the 
        nation's system of community-based cancer care.
         To ensure long-term solvency, Medicare policy should 
        prove fiscally responsible; however, changes to Medicare 
        reimbursement should not result in such financial pressures 
        that patients would lose access to nurses specially trained in 
        oncology. Oncology nurses are an integral part of a 
        comprehensive cancer care team and studies have shown that 
        patients fare much better when they receive care from health 
        care providers specially trained in oncology. To ensure the 
        highest quality of cancer care for Medicare beneficiaries, 
        Medicare policy should seek to safeguard the provision of 
        chemotherapy administration and related services by nurses 
        specially trained in oncology.
         The Medicare program should provide adequate 
        reimbursement for the full-range of supportive care services 
        provided to oncology patients. Such services include: patient 
        counseling/psychosocial support, oncology social work, oncology 
        case management, medical nutrition therapy, and investigating 
        and enrolling patients in cancer clinical trials.

                        Endorsing Organizations:

       Alliance for Lung Cancer Advocacy, Support, and Education

                Association of Community Cancer Centers

                           Cancer Care, Inc.

                 Cancer Research Foundation of America

               Candlelighters Childhood Cancer Foundation

                       Colorectal Cancer Network

                    International Myeloma Foundation

                       Kidney Cancer Association

                      Leukemia & Lymphoma Society

                          Men's Health Network

           National Association of Pediatric Oncology Nurses

                 National Association of Social Workers

                  National Patient Advocate Foundation

                  North American Brain Tumor Coalition

                        Oncology Nursing Society

                    Ovarian Cancer National Alliance

                 Pancreatic Cancer Action Network, Inc.

                              US Oncology

                                ------                                

                          National Patient Advocate Foundation, and
                                           Oncology Nursing Society
                                                 September 30, 2002
The Honorable Max Baucus
Chairman
Committee on Finance
United States Senate
219 Dirksen Senate Office Building
Washington, DC 20510

    Dear Mr. Chairman:

    On behalf of our organizations committed to ensuring access to the 
full-range of quality cancer care for all individuals in need, we are 
writing to voice our concerns about linking the reform of the Average 
Wholesale Price (AWP) for drugs with the provision of coverage for oral 
anti-cancer therapies under Medicare. While we support both reform of 
the current AWP system and the expansion of Medicare coverage to 
include all oral anti-cancer drugs, we have serious concerns about the 
possibility of a proposal to do so without the necessary and 
appropriate adjustments to Medicare practice expenses for the actual 
provision of oncology care. Unless Medicare provides adequate 
reimbursement for the full-range of oncology care associated with 
chemotherapy, such a dramatic change in the Medicare program could have 
devastating effects on beneficiary access to the care they need and 
deserve.
    Due to the tremendous progress that has been achieved in biomedical 
research, significant advances have been made in the development of new 
cancer therapeutics that are having a dramatic impact on the quality of 
cancer care in America. However, as you know, many of the newest anti-
cancer drugs are not covered under Medicare because they are available 
only in oral form and there is no injectable equivalent. To address 
this inequity, Senator Olympia Snowe has introduced S. 913, the 
``Access to Cancer Therapies Act,'' which will provide Medicare 
coverage for these life-saving oral anti-cancer therapies. More than 
half of your colleagues in the United States Senate have co-sponsored 
this legislation. While we strongly support a comprehensive Medicare 
prescription drug benefit, we believe Medicare coverage for oral anti-
cancer drugs would serve as an important first step. We advocate 
passage of S. 913 either as a free-standing bill or as part of other 
Medicare legislation enacted this year.
    We are concerned, however, that some are considering that an 
expansion of Medicare coverage to include oral anti-cancer drugs should 
be funded by an overall reduction in payments for chemotherapy. As you 
know, the issue of reforming the payment methodology for chemotherapy 
and related practice expenses has been discussed for many years. Our 
organizations have participated in numerous meetings with your 
colleagues and your staff to highlight the concerns of cancer patients 
and their families surrounding this issue. We strongly support balanced 
reform of the current Medicare reimbursement system for cancer care. 
However, we are extremely concerned that access to quality cancer care 
will be endangered if balanced reform is not achieved.
    The key to balanced reform is ensuring that the providers of cancer 
care to our nation's seniors have the resources necessary to ensure 
that Medicare beneficiaries with cancer can receive high quality care 
in their own communities. Currently, the Medicare system wrongly and 
grossly overpays for drugs while simultaneously dramatically underpays 
for chemotherapy administration and the practice expenses associated 
with cancer treatment and supportive care. This distorted reimbursement 
system must be remedied by decreasing drug payments to a level more 
aligned with actual cost while at the same time increasing practice 
expense payments so they more accurately cover real expenditures.
    Using the ``savings'' from AWP reform to fund coverage of oral 
anti-cancer drugs without a commensurate increase in the oncology 
nursing and related practice expenses is a short-sighted and flawed 
approach. First, it fails to ensure that community-based cancer 
providers will have the overall resources necessary to continue to 
provide quality cancer care. Second, the use of oral anti-cancer 
therapies necessitates the active involvement of a multi-disciplinary 
cancer care team involved in patient and therapy management. Many 
erroneously believe that Medicare beneficiaries will just get a 
prescription filled and disappear from the cancer care system. Those 
individuals taking oral therapies will need to be trained and educated 
as to how to take their therapy regimen, monitored by their cancer care 
team to ensure compliance and manage side-effects, and counseled 
regarding other prescription drugs they may be taking as the average 
Medicare beneficiary takes four prescriptions a day and fills 18 a 
year. Providing oral-drug coverage without also allocating the 
resources necessary to oncology practices so they can provide their 
patients with the supportive care they need is irresponsible and not to 
the benefit of our nation's seniors.
    We believe, however, that balanced reform can be achieved and we 
have worked with our colleagues in the cancer community to develop the 
attached comprehensive reform proposal for your consideration. We 
welcome the opportunity to speak with you and your staff about our 
proposal and believe we can strike a much-needed balance in proving 
fiscally responsible while ensuring access to quality cancer care that 
Medicare beneficiaries need and deserve.
    We strongly encourage you to resist efforts to provide Medicare 
coverage for oral anti-cancer drugs by reducing payments to physicians 
for chemotherapy and related practice expenses. One is not a 
replacement for the other. Coverage for traditional chemotherapy and 
the full range of oral anti-cancer drugs coupled with adequate 
reimbursement for care provided by a multi-disciplinary oncology care 
team are essential if Medicare beneficiaries with cancer are to 
continue to have access to quality cancer care in their communities.
    Thank you for your consideration of our viewpoint on this important 
issue. Should you have any questions on this or other cancer-related 
matters, please do not hesitate to contact any of our organizations.
            Sincerely,
                                              Nancy Davenport-Ennis
                                                    President & CEO
                                          Pearl Moore, RN, MN, FAAN
                                            Chief Executive Officer
    (Similar correspondence was sent to Senate Finance Committee 
Ranking Member Charles Grassley.)

                                
