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

    LESSON'S LEARNED: THE DEPARTMENT OF VETERANS AFFAIRS PRESCRIPTION DRUG
                               PURCHASING PROGRAM

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

                                    HEARING

                                   before the

                       SUBCOMMITTEE ON NATIONAL SECURITY,
                       VETERANS AFFAIRS AND INTERNATIONAL
                                   RELATIONS

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 22, 2002

                                   __________

                               Serial No. 107-214

                                   __________

           Printed for the use of the Committee on Government Reform

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

                                     ______

    87-140              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
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                         COMMITTEE ON GOVERNMENT REFORM

                         DAN BURTON, Indiana, Chairman
    BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
    CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
    CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
    ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
    JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
    STEPHEN HORN, California             PATSY T. MINK, Hawaii
    JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
    THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington,
    MARK E. SOUDER, Indiana                  DC
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
    DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
    DOUG OSE, California                 DANNY K. DAVIS, Illinois
    RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
    JO ANN DAVIS, Virginia               JIM TURNER, Texas
    TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
    DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
    CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
    ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
    C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
    EDWARD L. SCHROCK, Virginia                      ------
    JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont
    JOHN SULLIVAN, Oklahoma                  (Independent)

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
                         James C. Wilson, Chief Counsel
                         Robert A. Briggs, Chief Clerk
                     Phil Schiliro, Minority Staff Director

     Subcommittee on National Security, Veterans Affairs and International
                                   Relations

                    CHRISTOPHER SHAYS, Connecticut, Chairman
    ADAM H. PUTNAM, Florida              DENNIS J. KUCINICH, Ohio
    BENJAMIN A. GILMAN, New York         BERNARD SANDERS, Vermont
    ILEANA ROS-LEHTINEN, Florida         THOMAS H. ALLEN, Maine
    JOHN M. McHUGH, New York             TOM LANTOS, California
    STEVEN C. LaTOURETTE, Ohio           JOHN F. TIERNEY, Massachusetts
    RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
    TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
    DAVE WELDON, Florida                 DIANE E. WATSON, California
    C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
    EDWARD L. SCHROCK, Virginia

                                   Ex Officio

    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                Lawrence J. Halloran, Staff Director and Counsel
                  Kristine McElroy, Professional Staff Member
                               Jason Chung, Clerk

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on July 22, 2002....................................     1
    Statement of:
        Ogden, John, Chief Consultant, Veterans Health
          Administration, Pharmacy Benefits Management, Department of
          Veterans Affairs; and William Conte, Director, Department
          of Veterans Affairs Medical Center, Bedford, MA............    78
        Waxman, Judy, deputy executive director, Families USA; Dr.
          Alan Sager, professor of health services, director, health
          reform program, Boston University School of Public Health;
          and Cynthia Bascetta, Director, Health Care, Veterans'
          Health and Benefits Issues, General Accounting Office......    19
    Letters, statements, etc., submitted for the record by:
        Allen, Hon. Thomas H., a Representative in Congress from the
          State of Maine, prepared statement of......................    17
        Bascetta, Cynthia, Director, Health Care, Veterans' Health
          and Benefits Issues, General Accounting Office, prepared
          statement of...............................................    45
        Conte, William, Director, Department of Veterans Affairs
          Medical Center, Bedford, MA, prepared statement of.........    92
        Lynch, Hon. Stephen F., a Representative in Congress from the
          State of Massachusetts, prepared statement of..............    58
        Ogden, John, Chief Consultant, Veterans Health
          Administration, Pharmacy Benefits Management, Department of
          Veterans Affairs, prepared statement of....................    81
        Sager, Dr. Alan, professor of health services, director,
          health reform program, Boston University School of Public
          Health, prepared statement of..............................    35
        Shays, Hon. Christopher, a Representative in Congress from
          the State of Connecticut, prepared statement of............     3
        Tierney, Hon. John F., a Representative in Congress from the
          State of Massachusetts, prepared statement of..............     7
        Waxman, Judy, deputy executive director, Families USA,
          prepared statement of......................................    22

    LESSON'S LEARNED: THE DEPARTMENT OF VETERANS AFFAIRS PRESCRIPTION DRUG
                               PURCHASING PROGRAM

                                  ----------

                             MONDAY, JULY 22, 2002

                      House of Representatives,
    Subcommittee on National Security, Veterans Affairs
                           and International Relations,
                                Committee on Government Reform,
                                                            Boston, MA.
        The subcommittee met, pursuant to notice, at 9:30 a.m., in
    McCormack Courthouse, 1500 John W. McCormack Post Office and
    Courthouse, 90 Devonshire Street, Boston, MA, Hon. Christopher
    Shays (chairman of the subcommittee) presiding.
        Present: Representatives Shays, Tierney, Allen and Lynch.
        Staff present: Lawrence J. Halloran, staff director and
    counsel; Kristine McElroy, professional staff member; and Jason
    M. Chung, clerk.
        Mr. Shays. The quorum being present, the Subcommittee on
    National Security, Veterans Affairs and International
    Relations, hearing entitled ``Lessons Learned: The Department
    of Veterans Affairs Prescription Drug Purchasing Program'' is
    called to order.
        We welcome our witnesses. We welcome our guests. Good
    morning to everyone.
        At the invitation of Congressman Tierney, the subcommittee
    has come to Boston today to discuss the Department of Veterans
    Affairs, VA, prescription drug benefit program and the impact
    of Federal pharmaceutical purchases on the national effort to
    made medicines more affordable. These are important issues to
    veterans, senior citizens and to all of us as health care
    consumers.
        In the current debate on how best to structure a Medicare
    prescription drug benefit, VA and the Department of Defense
    programs offer important lessons and cautions about how to
    expand and access and control costs.
        As the General Accounting Office [GAO] recently concluded,
    ``Considerable leverage can be exerted when the departments
    commit to buy increased volumes of a particular drug when there
    are generic drugs or brand name drugs that are interchangeable
    in efficacy, safety and outcomes.''
        Bringing the benefit of that leverage to patients is a
    matter of fiscal discipline and effective medical management.
    Savings from national contracts and use of evidence-based
    formularies can work to make therapies more affordable in the
    context of a complete health care delivery system.
        But VA cannot afford to become a mere prescription window.
    VA health facilities in many areas are already straining under
    the weight of increased demand by veterans who once had access
    to affordable care elsewhere.
        To save costs, not just shift costs, strategies to reduce
    prescription drug expenditures must focus on health outcomes as
    well as a healthy bottom line.
        In this area, and on other important issues, Mr. Tierney
    has been a thoughtful, hard working partner in our partnership
    oversight of Federal programs. The subcommittee is grateful for
    the opportunity to be here today and we look forward to the
    testimony of all of our witnesses.
        [The prepared statement of Hon. Christopher Shays follows:]
        [GRAPHIC] [TIFF OMITTED] T7140.001

        [GRAPHIC] [TIFF OMITTED] T7140.002

        Mr. Shays. I would extend that by saving gratitude to Mr.
    Allen and I think Mr. Lynch will be joining us. I am fortunate
    to chair a committee of just outstanding members, any one of
    whom could take this gavel and make sure this committee served
    well.
        At this time I would recognize Mr. Tierney, and again,
    thank you for asking us to be here.
        Mr. Tierney. Thank you, Mr. Chairman. I want to extend my
    gratitude to you for having this hearing and bringing it up to
    the Boston area in Massachusetts. Like everywhere else in this
    country, this is a very significant issue in Massachusetts and
    in my District, as well as others.
        I want to also thank Tom Allen, who has been a leader on
    this issue for some time, particularly with regard to the cost
    aspects of it. No matter what we do in terms of trying to make
    prescription drugs accessible to people, the cost is always
    going to be an issue and that's one thing we both are going to
    address here today.
        The fact of the matter is that we're bankrupting many, many
    individuals, many of them seniors right now by the high cost
    charged to individuals for prescription drugs and if we were to
    put an end to Medicare or any other program, we'd run the risk
    of bankrupting that program if we didn't also attend to the
    issue of cost.
        Once again, last year we saw double digit increases in
    prescription drug spending in this country, an increase of 17.1
    percent in 2001. Once again, prescription drugs are one of the
    facet growing components of health care. Once again, seniors
    remain the hardest hit because they were the most in need of
    prescription drugs while remaining of the least likely groups
    to have prescription drug insurance. And Judy Waxman will
    testify to that, that 50 percent of Medicare beneficiaries were
    without prescription drug insurance at some point during the
    year and nearly 30 percent had no drug coverage at all. And
    once again, it remains my hope that this situation will change
    and that Congress will demonstrate the political will to
    protect its most vulnerable citizens by passing a comprehensive
    Medicare prescription drug benefit.
        In the past, as a Nation, when we had the political will to
    protect and serve the most vulnerable, we have been up to the
    task. There are lessons to be learned from these efforts and
    today we'll focus on Department of Veteran Affairs' efforts to
    manage a pharmacy benefit that is both cost effective and able
    to provide a high quality benefit to its patients.
        One of our charts paraphrases a GAO study that reported
    that the VA national contract prices were up to 70, 72 and 88
    percent lower than the recommended retail price for cholesterol
    lowering drugs.
        It's clear from VA's success at negotiating lower drug
    prices that drug manufacturers have the ability to make a
    profit without charging their highest prices. We can also see
    that there's room for negotiations in drug manufacturers'
    profit margins when, even in the most dire circumstances, the
    manufacturers can still make a profit.
        Last October, when this country suffered from a terrorist
    attack in the form of anthrax sent through the mail, we needed
    affordable antibiotics. Health and Human Services Secretary
    Tommy Thompson convinced Bayer to provide Cipro to the United
    States at a discount. Because of the size of the order placed
    by our government, Bayer still walked away with millions of
    dollars in profit.
        We have a chart that shows that in 2001, the pharmaceutical
    industry was the most profitable industry in the United States
    with 18.5 percent of its revenues going to profits. The next
    most-profitable industry, commercial banking, had 13.5 percent
    of revenues going to profits. The median for the Fortune 500
    companies was profits at 3.3 percent of revenue.
        Some of our witnesses today will talk about how drug
    companies use that money. The companies claim that their high
    prices are necessary to support research and development, but
    we'll hear today about where the money really goes. We'll hear
    that the companies spend significantly more money on marketing,
    advertising, and administration than they do on research and
    development. And we will also hear that drug companies make
    more in profits than they spend on research and development.
        I think it's also important to remember that a large
    portion of the dollars for pharmaceutical research and
    development comes from taxpayers. Pharmaceutical companies have
    benefited from the basic drug research conducted primarily
    through the National Institute of Health. Of the 21 most
    important drugs introduced between 1965 and 992, 15 were
    developed using knowledge and techniques from federally funded
    research. That research has contributed to the development of
    drugs to treat cancer, HIV, depression and other diseases--
    drugs that are now reaping billions of dollars in revenues for
    drug manufacturers.
        We have to find a way to bring down the costs of drugs,
    especially for the elderly. As we'll hear today, we don't need
    to reinvent the wheel. Instead, we can learn from the VA's
    success at getting lower drug prices and adapt those lessons to
    other settings. And we'll see that there is room for
    negotiation in the drug manufacturers' profit margins.
        I believe the time has come to put patients over profits,
    to learn from our successes and to protect our most vulnerable
    citizens with a cost effective and high quality drug benefit.
        The fact of the matter is that we can do all of that while
    providing manufacturers with the resources for research and
    development and a decent profit. So I look forward to the
    testimony of all the witnesses that are here today. I thank
    them for coming and I welcome them to the hearing. And again,
    thank you, Mr. Chairman, for being so strong on this issue for
    letting us have this hearing here.
        [The prepared statement of Hon. John F. Tierney follows:]

        [GRAPHIC] [TIFF OMITTED] T7140.003

        [GRAPHIC] [TIFF OMITTED] T7140.004

        [GRAPHIC] [TIFF OMITTED] T7140.005

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        [GRAPHIC] [TIFF OMITTED] T7140.008

        [GRAPHIC] [TIFF OMITTED] T7140.009

        [GRAPHIC] [TIFF OMITTED] T7140.010

        Mr. Shays. I thank the gentleman. At this time I recognize
    Mr. Allen from Maine.
        Mr. Allen. Thank you, Mr. Chairman. I want to thank you and
    Congressman Tierney for organizing this hearing. I came down
    from Maine this morning because I knew I would learn something
    from our panelists and from the interaction with our--as we go
    on through the hearing.
        Congressman Tierney has been a tireless advocate,
    absolutely tireless advocate for our seniors and others in need
    of assistance with the high cost of their prescription drugs.
    And Chairman Shays, I have to say is my model chairman. We all
    should hope that if we ever do get the gavel, we handle it the
    way he does.
        Congress has been working on legislation to provide
    Medicare beneficiaries with prescription drug coverage.
    Although the structure of the various plans we have considered
    have varied greatly in administration, benefit structure and
    cost sharing, the urgent need for a Medicare prescription drug
    benefit is clear. Seniors in Maine cannot wait any longer for
    prescription drug price relief.
        Prescription drug expenditures have continued to rise
    almost 20 percent each year for the last 6 years or so. By
    comparison, spending for physician and clinical services grew
    by approximately one third and expenditures for hospitals
    increased by one fifth between 1995 and the year 2000.
    Escalating drug costs contribute to higher insurance premiums
    and higher out of pocket spending for everyone with insurance.
    According to a recent Families USA study, over one third of the
    increase in national prescription drug spending from 2000 to
    2001 was directly attributable to increases in drug prices. And
    the other one third is basically related to increased use of
    prescription drugs and the substitution of newer, high cost
    prescription drugs for older, lower cost prescription drugs.
    Because of high premiums, fewer and fewer Medicare recipients
    in Maine can afford the Medicare supplements that have the
    prescription drug coverage.
        These trends lead to more and more veterans seeking to
    enroll in the VA health care system in order to obtain the
    prescription drug benefit. The $7 co-payment for prescription
    drug is very enticing for those individuals with little or no
    prescription drug coverage. However, the increased number of
    veterans coming into the system leads to higher case loads and
    longer waiting lists. At Togus, Maine's only VA hospital, for
    example, there are over 4,000 veterans awaiting assignment to a
    primary care physician.
        The average wait for an initial appointment is now back up
    to 1 year. It was better a while ago. I know one veteran who
    had to wait 9 months to get in to see a doctor. When it finally
    came time for his appointment, the veteran was diagnosed with
    prostate cancer. His doctor said if he had seen him 6 months
    earlier, his life could have been saved.
        In Maine, over the last 2 years, the VA medical system has
    added over 500 veterans to its practice every month. Under the
    current compensation formulary, this should mean a commensurate
    increase in funding for those facilities. Unfortunately, the
    formula also contains a huge 2 year lead time in recognizing
    this increase. So we're getting paid for the number of veterans
    that we had 2 years ago.
        I would like to this opportunity just to commend the staff
    at Togus. They're not here, but they do a terrific job. They're
    dedicated, hardworking. They do feel understaffed and
    underworked and I am convinced they work hard and do the best
    they can and with limited resources. The fundamental problem is
    the lack of affordable prescription drugs in the civilian
    market is resulting in a deluge of veterans forced to turn to
    the VA in order to afford the drugs their doctors prescribe.
        If we fail to address the prescription drug pricing issue
    and don't add a prescription drug benefit to Medicare, the VA
    system will continue to be overwhelmed. The increasing backlog
    created by the influx of veterans seeking lower cost
    prescription drugs means that more and more patients with
    chronic illnesses will not receive timely and appropriate care.
        I believe one lesson to be learned is that the VA system
    works. It provides affordable prescription drugs through bulk
    purchasing using the buying power of more than 90 million
    veterans. While the model works, the capacity of the VA health
    system is totally inadequate. We should be replicating the
    model in one way or another, the model of the VA, for the
    entire Medicare population so we can leverage the buying power
    of the 40 million Americans who are Medicare beneficiaries.
        Thank you, Mr. Chairman, and thank you, Mr. Tierney. I'm
    very pleased to be with you today.
        [The prepared statement of Hon. Thomas H. Allen follows:]

        [GRAPHIC] [TIFF OMITTED] T7140.011

        [GRAPHIC] [TIFF OMITTED] T7140.012

        Mr. Shays. Thank you. I'd like the record to note that Mr.
    Tierney will be chairing this entire hearing.
        Mr. Tierney. Thank you, Mr. Shays. We're going to have our
    first panel testify today with Judy Waxman who is the deputy
    executive director of Families USA; Dr. Alan Sager who is
    professor of health services and director of the health reform
    program at Boston University School of Public Health; Ms.
    Cynthia Bascetta, who is the Director of Health Care for
    Veterans' Health and Benefits Issues at the General Accounting
    Office and with her is Jim Musselwhite who is the Assistant
    Director of the General Accounting Office, who I understand
    will not be testifying.
        Those people who are going to testify, will you please
    rise.
        [Witnesses sworn.]
        Mr. Shays. Let the record reflect that the witnesses have
    testified in the affirmative.
        Ms. Waxman, why don't we start with you.

    STATEMENTS OF JUDY WAXMAN, DEPUTY EXECUTIVE DIRECTOR, FAMILIES
     USA; DR. ALAN SAGER, PROFESSOR OF HEALTH SERVICES, DIRECTOR,
       HEALTH REFORM PROGRAM, BOSTON UNIVERSITY SCHOOL OF PUBLIC
    HEALTH; AND CYNTHIA BASCETTA, DIRECTOR, HEALTH CARE, VETERANS'
         HEALTH AND BENEFITS ISSUES, GENERAL ACCOUNTING OFFICE

        Ms. Waxman. Thank you, Congressman. Mr. Chairman and other
    Members of Congress, thank you so much for asking me to testify
    today. Families USA is a national organization that represents
    consumers and I've been asked this morning to give an overview
    of what's happening with drug crisis.
        Since 1995, national spending on prescription drugs has
    grown double the rate of growth of spending in other parts of
    the health care system, particularly hospital care, physician
    care and clinical services. Three trends have been driving this
    rapid sustained growth: the number of prescriptions per person
    is increasing, newer, higher cost prescriptions are replacing
    older, less costly drugs, and the prices of prescriptions keep
    rising. As already has been said this morning, more than a
    third of the increase in national prescription drug spending
    from 2000 to 2001 was directly attributable to increases in
    drug prices.
        As you are all aware, older Americans are the population
    most likely to need drugs and they are the least likely to have
    insurance coverage. For a number of years now, Families USA has
    monitored the 50 prescription drugs that seniors are most
    likely to take. Last month, we issued a report called ``Bitter
    Pill, the Rising Crisis of Prescription Drugs for Older
    Americans.'' And we found a number of interesting facts.
        The prices of the 50 most-prescribed drugs for seniors
    rose, on average, by nearly three times the rate of inflation.
    This is not a 1-year phenomenon.
        Forty-two of the 50 drugs were on the market for the 50-
    year period from 1997 to 2002 and they rose, on average, twice
    the rate of inflation during that 5 years.
        Twenty of the 50 drugs had been on the market for 10 years.
    The prices for nine of those drugs increased at least three
    times the rate of inflation and five of those drugs rose at
    least four times the rate of inflation.
        Now why are the prices rising so much? There's a couple of
    reasons I'd like to highlight this morning, two of them being
    brand name monopolies and also advertising.
        Generic drugs can offer seniors a lower cost alternative to
    higher cost brand names. Another fact, we found was that the
    yearly average for brand new drug for seniors was $1,106
    compared to $375 for generics. Additionally, in the last year,
    the price of generic drugs rose only 1.8 percent as compared to
    8.1 percent as an increase in brand name drugs. Not
    surprisingly, the brand name companies go to great lengths to
    prevent generic drugs from entering the market. This is a
    serious problem that Congress can address.
        Not coincidentally, high price drugs, some of which are
    among the most commonly prescribed for seniors are the most
    heavily advertised. Direct consumer advertising plays a major
    role in increasing the demand for many high priced drugs. I
    want to give you one example. In 2000, AstraZeneca, the maker
    of Prilosec, spent $107.5 million in direct-to-consumer
    advertising for this drug. In 2001, that company had sales of
    $5.68 billion for that drug alone. That shows you that direct-
    to-consumer advertising works for the manufacturers.
        As public concern mounts about the explosion of
    prescription drug costs, the pharmaceutical industry argues
    that the high drug prices are necessary in order to finance
    research and development. We've decided to look at how much
    profit the companies are actually making and where the money is
    going. So this month, just last week, we issued a report
    entitled ``Profiting from Pain: Where Prescription Drug Dollars
    Go.''
        What we did was we examined the SEC filings of the
    companies that offered those 50 drugs I spoke about earlier and
    there were nine publicly traded companies we could examine. As
    has already been said, the pharmaceutical industry is the most
    profitable industry in the United States for each of the past
    10 years. In 2001, their profits were 5.5 times as large as the
    median return for all Fortune 500 countries. Additionally, the
    nine companies we looked at generated $30.6 billion in profits
    last year which was more than 60 percent higher than
    expenditures on research and development.
        Many of the companies report marketing, advertising and
    administration together, so what we did is we looked at those
    items as compared to their spending on research and development
    and we found that in the nine companies, spent a total of $45.4
    billion on marketing, advertising and administration and only
    $19.1 billion on research and development. Eight of the nine
    companies actually spent twice as much on those items as they
    did on research and development.
        We think it's fair to say that the gap between the cost of
    medications Americans and particularly seniors need, and what
    they can afford is growing wider and wider. And as also has
    been mentioned, there are 50 percent of seniors do not have
    drug coverage at some time during the year and 30 percent don't
    have it at all. Sixty-five million Americans in total do not
    have drug coverage, pardon me, do not have insurance coverage
    for prescription drugs. So one obvious solution is to add a
    meaningful drug benefit for the Medicare program, but they must
    include systems to moderate the prices. One, for the seniors
    and two for the Medicare program itself, so the drug--so the
    program does not become unaffordable.
        But I wouldn't finish my testimony without saying that drug
    price moderation is necessary for Medicare, for insurers, for
    employers and for all others because we're in a situation now
    with consumers, all consumers are in jeopardy of facing the
    time when more and more drugs will simply be unaffordable and
    out of reach.
        Thank you.
        [The prepared statement of Ms. Waxman follows:]

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        [GRAPHIC] [TIFF OMITTED] T7140.022

        Mr. Tierney. Thank you for your testimony.
        Dr. Sager.
        Mr. Sager. Congressman Tierney, Congressman Shays, others.
    Good morning. Thank you very much for inviting me to appear
    before you. After distilling six lessons from the VA's recent
    experiences in paying for prescription drugs and from Congress'
    experiences in designing a Medicare medication benefit, I'll
    apply these lessons to crafting a new approach to a Medicare
    drug benefit.
        The six lessons. 1. The VA has become one of the main
    lightning rods in the electrical storm caused by the collision
    of soaring drug prices and lack of adequate insurance. The
    number of 30-day equivalent prescriptions filled by the VA in
    fiscal year 2001 was more than 2\1/2\ times as much as 5 years
    earlier.
        2. Owing to rising volumes and prices, the VA's drug costs
    are expected to double from $1.6 billion in fiscal year 1999 to
    a conservatively projected $3.3 billion in fiscal year 2003.
        3. The VA has shown that winning lower drug prices is a far
    more effective way to contain costs than is restricting use of
    drugs. But costs are projected to soar despite the VA's
    efforts.
        4. Unless we find a way to finance affordable drugs for all
    elderly, disabled and chronically ill Americans, the VA drug
    budget will explode or human suffering will magnify. Indeed,
    both are possible.
        Most of the VA's future efforts to limit its own
    obligations can succeed only by adding to the obligations of
    others. There has been too much of this already. Congress has
    won lower drug prices for Federal programs while allowing drug
    makers to charge higher prices to ordinary citizens.
        5. The VA's own problems would be eased by creating a
    strong Medicare prescription drug benefit. Building such a
    benefit has been stymied by the combination of one, high drug
    prices and two, the need to find new Federal dollars both to
    protect people who haven't been able to afford drugs in the
    past and to replace most of today's private spending by people
    who can somehow struggle to afford their medications. This
    dilemma appears to create a choice between continued suffering
    and much higher spending.
        6. Fortunately, there is a third choice which is reform.
    We've spent $200 billion on medications a year, this year. That
    makes the prescription drug problem literally the easiest one
    to solve in the United States of America. There are some unique
    opportunities.
        It's easy to design an inferior Medicare drug benefit with
    high premiums, co-pay and multi-thousand dollar donuts, holes,
    and other patient financial exposure. It's also easy to design
    a benefit that costs the Federal Government many new dollars.
    But low patient cost can and must be combined with low, new
    Federal costs and with comprehensive benefits.
        What are the costs of a good Medicare prescription drug
    program? My colleague, Deborah Socolar and I estimate the gross
    cost of a good Medicare prescription drug benefit at $2.2
    trillion for the full decade from 2002 to 2011 before factoring
    in opportunities for savings. Now this is for a full 10 years
    that needs to be compared carefully with other estimates that
    might be for 5 or 6 or 7 years.
        The costs includes, they start with three quarters of the
    spending projected by the CBO for its baseline in the absence
    of a new drug program, how much people are expected, Medicare
    eligible patients are expected to spend on drugs. An additional
    $440 billion, we estimate, would be necessary to buy drugs for
    previously uninsured Americans to pick up the higher volume of
    medications, if we pay retail price. We also budget $80 billion
    for a new center to measure which medications are effective,
    which are safe and who needs them and to disseminate that
    information to doctors and patients. Other minor costs for
    administration, building pharmacy capacity and the like.
        How to cover those costs. Through modest patient payments,
    substantial cost cuts capturing existing revenue and new
    Federal dollars. Patient payments cover one tenth of the
    amount. Premiums would be set at between 2.5 and 3 percent on a
    sliding scale of Social Security checks, so this could be a
    progressive premium that would not impoverish people who are
    getting $200 and $300 amount Social Security checks.
        Also, modest co-pays between $5 and $10 with substantial
    protections for low income patients. So that raises a tenth of
    the money.
        Reducing costs will cover a third of this money, of the
    $2.1 trillion we need, $2.1 trillion we need to raise.
        We would propose to cap the rise in total spending after
    this year at 8.5 percent a year instead of the 11.5 or 12
    percent or 12.5 percent that CBO projects will happen in the
    absence of intervention.
        This means that drug spending doubles only every 10 years
    instead of every 6 years as CBO projects. I think the drug
    makers can live with revenue that doubles every 10 years.
    Indeed, we would protect drug makers' profits as return on
    revenue, return on equity.
        Also, to save $400 billion over the 10 years, we would pay
    for higher volume of medications that newly covered people
    would be able now to afford, not at retail price, but at the
    marginal cost of producing the pills, to cover the drug makers'
    actual costs. We estimate that at 7.5 percent of retail. Once
    the drug makers do the research and bill the factories, the
    added cost of making more pills is tiny.
        We cover 40 percent of the cost by capturing existing
    revenue. $400 billion of that would be drug makers' own
    marketing and advertising costs, costs that they would no
    longer need to bear as part of a drug peace treaty, whereby
    information on which medications are needed would be
    disseminated by the new Public Refinance Center. We'd also
    capture $60 billion worth of State Medicaid spending, frozen at
    today's revenue levels, today's spending levels. $160 billion
    in Federal Medicaid spending and about $50 billion in VA
    spending. Also, about $175 billion in captured employer
    maintenance of effort, frozen at 20 percent of this year's
    level. These are obligations that employers take on to retirees
    and others.
        So we raise--recover, $1.75 trillion in cost, leaving about
    $375 billion to be covered by new Federal dollars. That's 18
    percent of the bill. And this $375 billion, 90 percent of that
    replaces existing private spending by Medicare patients as part
    of the new Medicare prescription drug program. Patients'
    financial exposure would be measured in the hundreds, not in
    the thousands, no donut, no hole. The pie chart included in the
    testimony itemizes the revenue sources.
        I'd be happy to provide additional supplementary
    information, either now or in writing and thank you very much
    for the chance to speak today.
        [The prepared statement of Mr. Sager follows:]

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        Mr. Tierney. Thank you very much, doctor.
        Ms. Bascetta.
        Ms. Bascetta. Good morning. I'm pleased to be here today.
    I've been asked to discuss the factors that have contributed to
    pharmacy costs, reductions in pharmacy costs in the VA and DOD
    as well as the continuing challenges that they face in
    procuring drugs jointly. Reflecting national trends, VA and DOD
    pharmacy expenditures have risen significantly, and they
    consume an increasing share of the Department's health care
    budgets. But pharmacy costs would have been even greater if not
    for the efforts taken by VA and DOD.
        In my remarks today, I would like to highlight formularies,
    purchasing agreements, mail order dispensing and joint
    procurement, four ways that VA and DOD have been able to reduce
    their spending on drugs. My comments are based on work that we
    conducted last year for you, Chairman Shays, and other
    requesters.
        First, VA and DOD have been able to control spending on
    drugs by establishing formularies. Through formularies, health
    care systems can control costs by effect physician-prescribing
    patterns. VA and DOD, for example, substitute lower or higher
    cost drugs on their formularies when they determine them to be
    therapeutically interchangeable, that is, essentially
    equivalent in terms of efficacy, safety and outcomes.
        In these cases, VA and DOD may restrict provider choice in
    closed classes or they may encourage the use of lower cost
    drugs in preferred classes. The Institute of Medicine studied
    VA's formulary and found that it was well-managed and not
    overly restrictive. In addition, IOM recommended that VA use
    more contracts to carefully limit drug choices in more classes
    based on quality and cost considerations.
        Second, VA and DO have reduced costs by using different
    purchasing arrangements to obtain substantial discounts on
    prescription drugs. For example, VA and DOD obtained favorable
    prices through the Federal Supply Schedule which accounted for
    the bulk more than 80 percent of their combined drug
    expenditures. These FSS prices are intended to be no more than
    the prices manufacturers charge their most favored, nonFederal
    customers under comparable terms and conditions. Also, by
    statute, they can purchase brand name drugs at a price at least
    24 percent lower than the nonFederal average manufacturer price
    which may be lower than the FSS price.
        VA and DOD have also been able to obtain even lower prices
    than FSS prices. For therapeutically equivalent drugs, they've
    used a competitively bidding process which has resulted in
    prices that average 33 percent below FSS prices.
        Third, VA has been able to cut dispensing costs for
    prescription drugs through its consolidated mail outpatient
    pharmacy centers. These CMOPs reduce costs through economies of
    scale. Mail-in refills by using highly automated CMOP
    technology is several times more productive than refilling
    prescriptions at VA hospitals and clinic. VA and DOD are
    currently working on a pilot demonstration to test the
    feasibility of using CMOPs to lower the cost of refilling
    military pharmacy prescriptions.
        Finally, VA and DOD have secured additional savings through
    joint procurement. In 2001, VA and DOD estimated savings of
    about $170 million per year from current and planned joint
    procurements. The Departments can exert considerable leverage
    when they commit to jointly buy increased volumes of particular
    generic drugs or therapeutically equivalent brand name drugs.
    Nevertheless, joint procurement remains one of their most
    important challenges. Significant differences between the VA
    and DOD health care systems make the joint purchasing of brand
    name drugs more difficult. According to Department officials,
    differences in their populations result in dissimilar patterns
    of drug use and demand. For example, VA serves mostly older men
    while DOD also serves younger men as well as their dependents,
    women and children. Also, finding overlap between their
    formularies has been complicated because VA's national
    formulary lists about 1,100 drugs in more than 250 classes,
    compared to DOD's much smaller basic core formulary of 175
    drugs in only 70 classes.
        Finally, DOD is concerned about its ability to persuade
    nonmilitary providers to prescribe drugs contracted for
    jointly. In 2000, private providers wrote about half of DOD's
    prescriptions. The Departments are continuing to pursue joint
    procurement of brand name drugs because they make up a far
    higher share of expenditures than generic drugs.
        Consequently, jointly procuring them could yield much
    greater financial benefits. For example, VA's brand name drug
    purchases in fiscal year 2000 were 36 percent of the volume,
    but 91 percent of their expenditures.
        Mr. Chairman, it would be crucial for VA and DOD initially
    and individual and together to stay focused on potential
    pharmacy cost savings to maintain control of their overall
    health care budgets.
        This concludes my statement and we'd be happy to answer any
    questions you might have.
        [The prepared statement of Ms. Bascetta follows:]

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        Mr. Tierney. Thank you. I want to thank all of you for your
    testimony. We are, in fact, going to have a round or maybe
    several rounds of questioning as we go forward.
        First, let me do some housekeeping. I ask unanimous consent
    that all members of the subcommittee be permitted to place any
    opening statement in the record and let the record remain open
    for 3 days for that purpose. Without objection, so ordered.
        [The prepared statement of Hon. Stephen F. Lynch follows:]

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        Mr. Tierney. I ask for further unanimous consent that all
    the witnesses be permitted to include their written statements
    in the record. Without objection, so ordered.
        And what we're going to do is because we're all getting
    along so well up here, everybody is deferring to everybody
    else, I'm going to start the questioning just to take that
    issue off the table and we'll go for 5 minutes and then we'll
    allow each of the Members--we'll probably go around for a
    number of cycles here until we get satisfied that we've got all
    the information that we think we can get this morning. Because
    what you're saying is obviously very helpful to us.
        Let me begin the question by asking Ms. Waxman, your
    testimony talked about a lot of places where the money goes
    once the pharmaceutical companies get their money in. We heard
    a lot of stock options, CEO pay, lately. I know that Families
    USA has done a report with respect to the CEO pay in the
    pharmaceutical industry.
        What have you learned from that report?
        Ms. Waxman. Yes, I actually have the report with me and I
    think it might be appropriate to enter it into the record as
    well.
        Mr. Tierney. So ordered.
        Ms. Waxman. I did not put in my testimony the exact
    numbers, but I do have it here. For example, what we looked at
    in the SEC report was not just the salary, but also the
    unexercised stock options as well. And so when you look at and
    I'm looking for my chart here, the total compensation for a
    number of the top executives, for instance, the total
    compensation for the top executive laboratories was over $10
    million. This is last year. And others are $12--I'm sorry, that
    wasn't the highest one. That was just the A. The highest one
    was almost $75 million.
        Mr. Tierney. $75 million?
        Ms. Waxman. Yes, for 1 year. So the point really of that is
    just that--the point we were really trying to make with those
    numbers is that while the companies are screaming that they
    need high costs to cover R & D, when you look at some of the
    ways they spend their money such as many, many millions of
    dollars for their top executives' compensation and you look at
    all the money spent on advertising, administration and
    marketing, then some of their claims about the need for high
    prices to cover R & D just don't live up.
        Mr. Tierney. Well, staying on that just for a second, one
    of the comments in here was that prices for prescription drugs
    have risen four times inflation, is that right?
        Ms. Waxman. Yes, this past year was almost three times.
        Mr. Tierney. Am I wrong in assuming that when a company
    gets the prescription drug ready to put on the market in the
    first place, no doubt sets the price at a level they think will
    give them a return on their investment?
        Ms. Waxman. I assume that's true.
        Mr. Tierney. And then I would think that the only
    adjustment after that would be necessary on that figure would
    be something that would account for inflation or increase in
    their costs?
        Ms. Waxman. I would think so.
        Mr. Tierney. Is it at all likely that the cost associated
    with marketing these pharmaceutical products are four times
    that of the cost of marketing any other product?
        Ms. Waxman. I think the reason we looked at the SEC reports
    and looked at how much profit there was, was really to make the
    connection that those prices are going up so much higher than
    inflation, really has more to do with profit for the industry
    than it does for research and development.
        Mr. Tierney. Thank you.
        [Pause.]
        Mr. Allen. Thank you all very much for being here. Ms.
    Bascetta, I wanted to ask you some questions about--I think you
    were saying that for therapeutically equivalent drugs you were
    able to enter into contracts and get reduced prices, but most
    of those are generic drugs as I recall.
        Ms. Bascetta. That's correct.
        Mr. Allen. And when you try to deal with brand name drugs
    you run into the problem of proving they are therapeutically
    equivalent and there are lots of steps. I think I was looking
    for the number here, but I remember the number 91 percent,
    whether that was in your testimony or in the materials that 91
    percent of your purchases are brand name drugs, not generic?
        [Microphone interference.]
        Ms. Bascetta. Ninety-one percent of the expenditures are
    for brand name drugs.
        Mr. Allen. OK, so 91 percent of the expenditures are for
    brand name drugs. Just by--do you know how much of the
    purchases are for brand name drugs, what percentage of the
    purchases? If you don't have it----
        Ms. Bascetta. We have that. We believe it's around 40
    percent.
        Mr. Allen. So 40 percent of the purchases are brand name.
    We'll correct that later, are brand name, but 91 percent of the
    cost.
        Ms. Bascetta. Thirty-six percent of the brand name and they
    account for 19 percent of the expenditures.
        Mr. Allen. Now I've introduced legislation in the Congress
    that would allow one of the existing Federal agency to do
    studies independent studies of the pharmaceutical industry that
    would look at the cost effectiveness and the comparative
    effectiveness of different drugs. The reason for doing that,
    this is a way of offsetting the impact of direct-to-consumer
    advertising, but if we had some sanctioned studies looking at
    the comparative effectiveness of drugs, different drugs, let's
    assume two brand name drugs, the thought is that then we could
    tell what we can't find out from the advertising, then we know
    which of the two drugs works the best and that's the kind of
    information you can't get now very easily in an independent
    way.
        Would that help or would you have to do something further
    than measuring comparative effectiveness in order to decide
    whether drugs were therapeutically equivalent?
        Ms. Bascetta. I can only tell you what I know the VA and
    DOD goes through and what similar large purchasers go through
    in making those decisions. And one of the first steps that they
    take is to look at their own populations and determine which
    drugs their populations need and then primarily to gain the
    support of their clinicians they use their pharmacy and
    therapeutics committees to go through these scientific
    processes of determining whether, in fact, the drugs are
    interchangeable and then as you've pointed, once they make that
    determination, they can competitively bid for the--solely on
    cost. But as to whether or not a process like that for the
    country would work, I don't know. I don't know enough about
    what FDA does in determining therapeutic equivalence of
    interchangeability, for example. Perhaps the VA witness, John
    Ogden, would be able to comment on that.
        Mr. Allen. Just to clarify some of your testimony, when
    you--you set up--the VA has a formulary. It operates its
    formulary. Does that--I just wasn't quite clear. Is that a
    formulary that operates with respect to both brand name drugs
    and generic drugs or do you run into the same kinds of problems
    you do with getting a contracted discount?
        Ms. Bascetta. No, they have both generic and brand name
    drugs on their formulary.
        Mr. Allen. So they basically pick--they're doing enough
    studies to figure out which drugs are preferable in which
    classes, whether or not they are brand name or generic.
        Ms. Bascetta. That's right.
        Mr. Allen. Thank you.
        Mr. Tierney. Mr. Shays.
        Mr. Shays. Thank you, let me--what I'm going to do is just
    tell you my attitude and then in the rounds of questions I have
    you can respond based on my general conception which may be
    true or not.
        Theoretically, the system, as I saw the pharmaceutical
    program in the United States to work was that you had
    incentives to drug companies to spend colossal sums of money in
    research. They would have an exclusive ability to sell their
    product if they were successful, make a very general profit and
    then ultimately that would become a generic drug in which the
    price would drop significantly and what you would have is this
    constant feeding of new brand breakthroughs plus older drugs
    that had proved quite successful.
        What I sense has happened is that the drug companies,
    particularly before the end of the cycle, if it's 17 years, mas
    o menos, they would trump that drug and convince the consuming
    public that the drug that they had just had the monopoly on is
    no longer the drug of choice. And in some cases that may be
    true. In other words, they may have come through with a
    significant break through or it may just be the difference
    between 98 percent and 100 percent.
        There is a challenge though because people always want the
    best and then the issue for me is when does the government step
    in and say we'll fund the drug that does 85 percent of what
    this new drug does at 100 percent.
        The other point that I would just bring to the table is I
    view the VA as being one of their greatest successes is that
    they have managed to buy drugs in large quantities, reduce the
    cost of those drugs 30 percent, give or take, and you then
    wonder why we don't do that for Medicare, in general, but in
    Medicare, we allow individuals to buy drugs as individuals, so
    there's no mass buying. So when I'm looking at the Department
    of Veterans Affairs, I'm also saying OK, we learn lessons how
    we can, under the Medicare program be buying at those, at that
    mass volume. So that's kind of my view.
        Ms. Waxman, you basically said that drug companies can
    extend their monopolies in a number of ways including
    marketing, what is essentially a new and improved version of an
    existing drug.
        Ms. Waxman. Right.
        Mr. Shays. That's one point. You say the claim the generic
    companies has infringed on patents holding the entry of the
    generic drug for up to 30 months. And then the last point was
    by entering into deals with generic manufacturers to delay
    their marketing of generic, that intrigues me first and that's
    the one I want to take up.
        Anyone can make a generic drug basically, so how would a
    drug company be able to prevent the generics from coming in
    under that third scenario, could you respond? I'd like a nice,
    loud voice.
        Ms. Waxman. What has happened is because the way the
    Federal law now is that governs generics, there is a Federal
    law now that governs the way generics can come into the market.
    There's a whole system. And so what happens is the generic
    would, the generic company would file a claim, let's put it
    that way, that the patent in existence is not infringed by this
    generic coming into the market and as to my third point, that
    one generic, if the company is successful gets 180 days
    exclusivity in the marketplace.
        Mr. Shays. Let me ask you this. Do different generic
    companies have to race to see which one gets there first?
        Ms. Waxman. Yes, they do have to race under current law, if
    they want that extra 180 days exclusivity; the theory being
    they did all the paperwork, they had to do other research, they
    did some work to be able to offer the generic, so they get this
    benefit of 180 days exclusivity. That is the theory.
        So what has happened, unfortunately, is as you might
    imagine, the generic companies are usually not as profitable,
    not as big as the big brand name companies, so on occasion the
    brand name has gone to the generic company and say I'll make
    you a deal. You're going to make X money in your 180-days
    exclusivity. I'll give you this much money. You don't even have
    to put the product on the market. I get to keep my patent for a
    longer period of time and everybody is happy. Everybody but the
    American consumer----
        Mr. Shays. Any company can jump into the marketplace?
        Ms. Waxman. Well, after that 180 days, then other companies
    can----
        Mr. Shays. Which company gets that first 180-day crack?
        Ms. Waxman. The first generic company that's ready to go to
    market. They get 180 days exclusivity on their generic product
    and so does that make sense? So what happens is the grand name
    says to the generic company, I'll make a deal with you. You
    don't even have to go to market. Just don't go to market and
    I'll give you this money. I get to keep my patent which I can
    charge a lot more, and both companies come out ahead. The
    problem is, of course, the American consumer is the loser and
    that has happened on a number of occasions. The FTC is actually
    looking into that problem and indeed, there are certainly
    different bills coming out of Congress that would fix that.
        Mr. Shays. Is there anyone else who wants to comment on
    this issue, the issue of the different ways the pharmaceuticals
    try to prevent the generics from coming in the marketplace,
    either adding a slight variation to their exclusive product or
    claiming the infringement. Do you basically accept all three of
    her points, Ms. Waxman's points, Dr. Sager?
        Mr. Sager. We might add pediatric exclusivity, if you test
    for pediatric use, you get an extension on your patent.
        Mr. Shays. Is that because companies tend not to invest as
    much in pediatric drugs because there's not a bigger market?
        Mr. Sager. The theory was that it costs additional money to
    conduct the additional trials, although it seems that typically
    the extra revenue garnered far exceeds the cost of the testing
    for pediatric use.
        Mr. Shays. I mean there's no question, if you make the
    generic, the cost of production can be quite small, so generic
    companies still can still make a very nice return.
        Mr. Sager. To which, of course, the brand name
    manufacturers would claim well, we need the high profits to
    finance their research. I think that's why----
        Mr. Shays. Let me just tell you, I happen to accept that
    part. I mean I was out with a company in California that
    invested $1 billion in a drug to retard the deterioration that
    would cause Alzheimer's, and so far they're out $1 billion. If
    they didn't get some--if they had succeeded, they would have
    had a license to print money, but frankly, we all would have
    benefited. So I accept some bit of that concept.
        Mr. Sager. I think it's a matter of balance.
        Mr. Shays. OK.
        Mr. Sager. We have some evidence recently that a massive
    effort to push generics would save only about 1.3 percent over
    a decade. I think we're skirmishing about unfortunately areas
    that are peripheral.
        Mr. Shays. Do you think the generic issue is peripheral?
        Mr. Sager. I think today it's a big focus and it's a way
    that many people hope in the short term to save money. For the
    long haul, I don't think it takes us very far. If we look at
    Western Europe, for example, most nations very little on
    generics. That's because they negotiate and set fair prices on
    the brand name drugs.
        Overall, what I think we need to do is design a package
    deal.
        Mr. Shays. I'm sorry, who sets a fair price on exclusive
    drugs?
        Mr. Sager. The government does, Cigna funds do. It's really
    a matter of public regulation that set the prices on the brand
    name drugs. And the prices are low enough so that there's just
    not--they don't rely on the very high prices on the brand name
    drugs followed by lower prices.
        Mr. Shays. I don't understand who they is. I'm sorry----
        Mr. Sager. I'm sorry, Western Europe governments.
        Mr. Shays. Yes, but I'm not aware that Western European
    governments have seen great breakthroughs in pharmaceuticals.
        Mr. Sager. I think that issue is----
        Mr. Shays. Canada controls prices. Are they having great
    breakthroughs as Western Europe?
        Mr. Sager. The new molecular entities, the new medications
    that come out of Western Europe pharmaceutical companies seem
    to be about proportionate. And their investment in research
    seems to be about proportionate to ours. I know Pharma denies
    that. But what's interesting is the world pharmaceutical
    companies earn a disproportionate share of profits in the
    United States because our prices are not regulated, but
    British, Swiss, Swedish, French, German and other
    pharmaceutical companies are quite innovative. They just don't
    make as much of their profit in their own companies.
        You might think of this as equal opportunity, pillaging and
    plundering of the American patient.
        Mr. Shays. I think that.
        Mr. Sager. And I don't think we can sustain that. I'm not
    saying that other countries need to pay more, but we need to
    pay less and I think that's part--a lower price for
    medications, but allow the drug companies to develop effective
    new breakthrough drugs to garner the higher profits they
    deserve through higher volume.
        Mr. Shays. Ms. Bascetta, is there any comment you'd like to
    make in this area?
        Ms. Bascetta. Only to say that GAO hasn't done any work on
    research and development and profitability in the drug
    industry.
        Mr. Shays. OK. Mr. Chairman, I'll do the next round, but I
    appreciate we're going to be doing 10-minute rounds?
        Mr. Tierney. Yes, I think that helps a lot. Let me just
    followup on that. I know that one of the mechanisms that VA
    would allow them to get 24 percent lower than the average of
    nonFederal price, is that right? Anybody want to step up on
    that?
        Mr. Sager. A minimum effect.
        Mr. Tierney. A minimum effect. And they do that how? Just
    by establishing that by Federal law that this is as much as you
    can charge? Is that a mandate? How does it come into play?
        Mr. Sager. My understanding is that they will get a price
    equal to the lowest price prevailing anywhere else, which is
    the way the Federal Government buys most things, not just
    medications.
        Mr. Tierney. So Ms. Bascetta, in the report, you indicated
    GAO had some concern that if we were to take the Medicare
    population, combine that with the VA and Department of Defense
    and all that, that one of the problems would be that other
    prices would go for other populations?
        Ms. Bascetta. That's correct.
        Mr. Tierney. So what we have here instead is that because
    other countries manage to find a way to negotiate a better
    price, the price in this country goes up. Wouldn't we be all
    better off if we also joined the fray and got some better
    prices and maybe it would even out a little bit as opposed to
    the people who just get whacked with higher prices all the
    time?
        Ms. Bascetta. It's certainly a vexing problem. The concern
    that we and others have raised is that as you pointed out, the
    more people have access to the FSS prices, the more that
    manufacturers would be inevitably driven to offset any
    decreases in revenue by increasing prices for those nonFederal
    purchasers.
        Mr. Tierney. Or people in other countries?
        Ms. Bascetta. Yes, wherever else they would have their----
        Mr. Tierney. Right now, every time they cut a deal with
    Canada or England or some other country, they just turn to the
    United States and say well, that's what we're going to get
    back. We'll just jack the prices up over there.
        Ms. Bascetta. I'm not familiar with the----
        Mr. Tierney. We've done studies in this committee, this
    subcommittee, the minority side have done studies to show that
    cost shifting actually occurs in a significant way.
        Ms. Bascetta. I'm certain that it does. But the tail
    chasing that occurs, unfortunately, is that those FSS prices
    ultimately go up because----
        Mr. Tierney. Well, they may go up, but they go up a little
    bit all across a much larger board instead of just going up
    over here. I guess I'm saying at some point people take
    advantage of the United States because we're the only country
    that seems to say these prescription drug companies just go out
    and treat us any way they want to treat us no matter no
    shabbily, but if we want to say that we're going to get in
    there and start negotiating for some better prices, then the
    prices everywhere in the world may have to shift a little bit
    as opposed to taking a lower price over Europe and decide we're
    going to make the profits in the United States and just take it
    on to them, right?
        Ms. Bascetta. I suppose that would be true.
        Mr. Tierney. Dr. Sager, let me go over--I assume my
    colleagues and other people hopefully have your charts. You put
    a proposal out here as to what you might do and I suspect that
    one of the good parts of your proposal is that you deal with
    that issue that we always hear about, if you lower our prices,
    we're not going to do any research, we're all going to die.
    That's essentially the comeback we get from the companies. You
    do that by making sure that the companies get a decent profit
    and that they get money for research and development?
        Mr. Sager. That's right.
        Mr. Tierney. Would that keep in place all the tax credits
    that they currently get for research and development which, as
    I understand it, reduces their taxable rate right now to
    something about 17 percent instead of 35 percent?
        Mr. Sager. I think it would be necessary top ut together a
    package deal, really sit back and negotiate all of the
    arrangements by which drug makers garner revenue to first of
    all sustain competition by protecting businesses, allow them to
    ride out the dry seasons. Competition requires competitors.
    Competition will prompt more breakthroughs. Mergers probably
    will reduce innovation.
        I think that profits should be commensurate with risk and
    with the value of the drug they produce. Unfortunately, in
    today's market, where we lack a competitive marketplace, drug
    makers set prices to maximize revenue and they may be able to
    persuade doctors and patients to prescribe and buy drugs out of
    proportion to the value of the medications because we don't
    have a free market at work.
        Mr. Tierney. I'm going to just for the sake of time here,
    I'm going to assume that your calculations on the gross
    constant elements of the medication prescription drug benefit
    are accurate and we have time later, we can go over that, but
    you basically come down to the figure $2,153,000,000 for a 10-
    year period, 2002 to 2011. That's for everybody being able to
    get their prescription drugs, that's the veterans' population,
    the seniors' population, being able to get them at a reasonable
    program that you've described for very low co-pay and a very
    low deductible and then help them from then on in.
        Mr. Sager. For all Medicare eligibles.
        Mr. Tierney. For all the Medicare eligibles. And whether or
    not they're veterans or anybody, right, you include them?
        Mr. Sager. Yes sir.
        Mr. Tierney. Now I'll cover the gross cost, the way that
    you would expect to pay for this and maybe you can explain a
    little bit more so even I can understand. The patient payments
    you indicate, you would charge a premium of 2.5 to 3.5 percent
    of someone's Social Security check and that small amount would
    then rise by 2.5 percent a year.
        Mr. Sager. Yes.
        Mr. Tierney. What do you suspect would be the lowest
    premium somebody would pay, what would be the highest somebody
    would pay under Social Security?
        Mr. Sager. Premiums would range from about $6.50 a month up
    into the $40 range.
        Mr. Tierney. And that would be pretty much the extent of
    it. And you would have co-pays of $5 or $10 with one third that
    are given to low income patients?
        Mr. Sager. That's right. The one third of the total co-pay
    amount would be directed toward lower income people.
        Mr. Tierney. And they would pay no co-pay or just a smaller
    co-pay?
        Mr. Sager. There might be a nominal $1 co-pay.
        Mr. Tierney. All right, then you get back a sizable amount
    of money, almost $964 million by capping the annual rise in
    total spending after 2002 at 8.5 percent annually and you would
    just have this--this law would just mandate to the companies to
    make 8.5 percent per year increase and that's it.
        Mr. Sager. Increase in revenue, yes. And that would also
    be--actually, that would garner around, that would save around
    $300 billion and we'd save around $400 billion by paying for
    new prescriptions that Medicare patients were now able to
    afford, by virtue of the Medicare benefit at the cost of
    manufacture. So the manufacturers don't earn windfall profits
    on the higher volume, but their actual costs of making more
    pills are covered.
        Mr. Tierney. So if I'm making Medicine A and I'm selling to
    one population now, I'll be able to make every year after this
    8.5 percent annually, increase on that?
        Mr. Sager. In total revenue.
        Mr. Tierney. In total revenue. And how do we check that?
    How do we police that?
        Mr. Sager. We check their financial reports year by year
    and if they generated too much money, next year's prices would
    be adjusted down. And so this would be reconciled year by year.
        Mr. Tierney. And how do we keep track now, the second part
    of that, how do we keep track of the additional people coming
    on because we've now created this new benefit and separate them
    out from the others so that we know that the manufacturers are
    going to get their marginal cost on that group? How do we
    logistically do that?
        Mr. Sager. We could translate this into an overall price
    discount on all drugs because that would be--it would make the
    record keeping far easier. This translate into a 22 percent
    effective price discount.
        Mr. Tierney. And then you would capture your existing
    revenue in a number of different ways. the largest capture
    seems to capture offset marketing and advertising by growing at
    12.5 percent annually. Explain to me what you mean by that,
    please?
        Mr. Sager. Well, the drug makers, if they accepted this
    arrangement, would no longer be marketing and advertising their
    own medications. Instead, a federally financed, publicly
    financed organization, maybe a separate nonprofit organization,
    would be evaluating the safety and efficacy of new medications
    and indicating which patients the medication would be useful
    for and provide that information to patients and to physicians.
    One source, objective information. In that case, we would say
    to the drug makers, you no longer need to market and advertise.
    Provide the dollars that you would have spent on marketing and
    advertising to help pay for the cost of this new benefit.
        Mr. Tierney. I see some problems with that. One is you're
    only going to get people to compete through advertising and
    marketing and they say I won't play. I think I do a better job
    of effectively advertising than the guy next door and that's
    how I want to effectively get the market share, so that's going
    to have to be more of a mandate than a voluntary mode, I
    suspect.
        Mr. Sager. And that's tough because of first amendment
    issues. That's why it might be a contractual arrangement. If
    you'd like Medicare to pay for your medications, you need to
    sign on board.
        Unfortunately, I think the prescription drug industry is
    thinking short-term bottom line next quarter, higher prices,
    profits, making more through marketing, through breakthroughs,
    through higher prices on existing medications as Judy Waxman
    testified.
        Unfortunately, I don't think that's going to work forever.
    It's not going to work for them and it's not going to work for
    us and unless they're willing to consider alternative
    arrangements, we may suffer something like World War I, 4 years
    of blood and machine guns and gas and no progress. Better to
    have an armistice and a peace treaty in 1914. And I think we
    need new ways of thinking about medications and paying for
    them.
        Mr. Tierney. Well, how do you stop a company from saying
    that arrangement, well, I wasn't going to advertise at all this
    year, so I'm not going to put any money in the pot.
        Mr. Sager. We would look at the historical record and
    extrapolate forward.
        Mr. Tierney. And marry them for life on that. And what
    about new products coming on market? How do we determine how
    they would have advertised for that? Again, just use some
    extrapolation out of previous products?
        Mr. Sager. I think that would be right. Or we could take
    the historic average for that company, looking how it marketed
    new medications.
        Mr. Tierney. And then you would capture the Medicaid
    dollars from States, whatever they were paying to Medicaid and
    now they're paying through this program?
        Mr. Sager. Right, and that would be frozen at today's
    levels. So they would have instant relief.
        Mr. Tierney. And the same with the Federal dollars with the
    projected rise, you'd now apply them to that and the VA dollars
    the same way?
        Mr. Sager. Yes.
        Mr. Tierney. And capture employer maintenance of effort.
    Explain to me what you mean by that last item there?
        Mr. Sager. Employers provide--employers still finance very
    substantial amounts of prescription drug for employees who are
    Medicare eligible, over 65 and especially for retirees. The
    employers are finding it very difficult to sustain, as you
    know, their retiree health benefits owing to the rising costs,
    principally of medications.
        In many instances, these are contractual obligations or in
    other instances, moral obligations and employers suffered
    terrible black eyes in the public and in the relations with
    existing workers and retirees if they reneg on commitments. So
    we would engage employers that now have these obligations and
    say we'll buy you out, but you maintain your effort at 20
    percent of today's level.
        Mr. Tierney. So you're counting the fact that all of them
    are substantially would participate as opposed to turning down
    your offer?
        Mr. Sager. Those that now pay.
        Mr. Tierney. Thank you. Mr. Allen.
        Mr. Allen. Thank you, Mr. Tierney. Ms. Bascetta, I want to
    come back to you for a moment.
        Mr. Tierney did a good job of laying out what I have always
    taken to be the GAO argument about what happens if you reduce
    prices for one group that is on the Federal Supply Schedule and
    again, we're getting the benefit of the Federal Supply
    Schedule.
        Mr. Tierney said and he extended it to other countries, and
    this is common currency in the debate in Washington among
    Members in Congress too. And the suggestion is that if you give
    someone who is not getting a discount now, that the industry
    will be forced, this is sometimes a verb, encouraged, whatever,
    given an incentive, to raise prices to other groups.
        I want to make an argument to you as to why that argument
    and it is an estimate about future behavior. It is, in its
    nature, it's not so much a matter of fact as a matter of
    opinion, but let me give you this argument. I spent some time
    talking a few years to someone who used to set prices, who used
    to work for a pharmaceutical company setting prices and
    basically, what the said they did was they charged what the
    market would bear in every market that they were dealing with.
        The point I am making is this. I suggest that what they are
    doing now is maximizing their return from every group to whom
    they sell prescription drugs, whether that group is Aetna or
    Cigna or the Veterans Administration or France or Germany or
    anybody else. They're always trying to get as much as they can
    because their job, the CEO's job is to maximize revenues and
    income and keep the stock price up.
        If that's the case, it is--they're getting as much out of
    Aetna now. If they lose--if there is pressure, if all Medicare
    beneficiaries got a discount now, there's still--it doesn't
    change the incentive to maximize the revenue from Aetna. This
    is not a case of--set of bottles of water where they all have
    to even out at the same level. So that's the conceptual
    argument. Here's the evidence to back it up. In January I was
    down at a conference in Florida with Mr. McConnell, the CEO of
    Pfizer. Pfizer has just announced its new discount program.
    They just said we will sell to every American senior under 200
    percent of the poverty level all of our medication which
    averages $61, $62 per month, we will sell them those drugs for
    $15 a month. If you move away--that's a 75 percent discount.
    You move away from Pfizer and look to the discount cards, every
    company that's advertising a discount card is saying we will
    give you a discount of 25 to 40 percent. Well, that's the
    discount that all of us are talking about.
        Now so the industry itself in the last year is really
    saying we can discount, provide substantial discounts to the
    Medicare population, but we certainly want Medicare to require
    that of us. That's one point.
        Second point, there are 330 million people in Europe. There
    are 25 million in Canada. There are 127 million in Japan. There
    are 280 million in this country. The Medicare population that
    we're talking about when we get to a Medicare benefit, it's
    probably about half. Let's say 19 million Medicare
    beneficiaries that cannot--that have either no coverage or
    inadequate coverage. It's simply, I would argue, it simply
    cannot be true that these 19--charging the highest prices in
    the world to these 19 million Americans is what shores up an
    international multinational pharmaceutical industry. That's a
    long ramp in many ways. But the point I'm trying to get at is
    and I'm here asking for your response, let me pose a question.
    Why isn't it the case that if you give all Medicare
    beneficiaries the same kind of discount or benefit, let's say
    discount through the Federal supply schedule, why isn't it the
    case that the industry will sell more drugs than they are now?
    That's what Mr. McConnell said down in Florida. He said I'm now
    going to Wall Street and telling them that this will not reduce
    our revenues or our earnings. Even though we're giving a 75
    percent discount to a significant number of seniors, it won't
    reduce our revenues or earnings. They'll sell more drugs and in
    any event, the market is expanding so fast that what's really
    going on, this is all about maximizing revenue and has almost
    nothing to do with the recovery of their costs. I'm sorry for
    doing that to you, but you see the conceptual challenge here
    that we face and I would like your reaction.
        Ms. Bascetta. I see the point that you're making and I have
    a few reactions.
        Mr. Allen. Can you talk a little louder, please?
        Ms. Bascetta. Yes, certainly. One is that in some of the
    work that we've done, we've looked at what would happen, we've
    looked at how difficult it would be to predict exactly what
    would happen if the Medicare population, for example, were able
    to buy the FSS prices and there we're simply comparing the size
    of that population compared to essentially VA and DOD. And of
    course, it's much bigger. We haven't looked at all the other
    markets and drug pricing is segmented by market, so we didn't
    look at the Medicare population compared to the world or all
    the other populations who would potentially be purchasing drugs
    at different prices. So that's one observation.
        Another though is that in situations where Medicaid has
    obtained rebates, in fact, what did happen is that prices to
    HMOs and other purchasers did go up. So I guess the cautionary
    note is that much of this very complicated. There's been a
    proliferation of these complex relationships and financing
    arrangements. Much of the information is proprietary. It's very
    difficult to tell, in fact, what is actually going on with
    regard to pricing. That's one of the reasons that we didn't--we
    were careful to say that you couldn't predict exactly how much
    FSS prices might go up, for example. It would depend on the
    specific drug, the number of people who would have access, the
    competition in that particular market, the price sensitivity of
    other purchasers. It's very hard to figure it out and our
    concern would be that without much better, much, much better
    data, there could be some unintended consequences of picking a
    particular way to solve the problem.
        Mr. Allen. And just for clarification, you said FSS prices
    could go up. And that's because, if I'm correct, and correct me
    if I'm wrong, that's because the FSS price is tied to something
    called the average manufacturer's price, is that right, in the
    statue?
        Ms. Bascetta. No. The FSS is based on the most favored
    price to a nonFederal customer.
        Mr. Allen. Right.
        Ms. Bascetta. So what would happen would be as the number
    of people having access to the FSS price rises, the supposition
    is that the drug companies would face a decline in revenue
    which would cause them to raise the price for those nonFederal
    customers. And because the FSS is benchmarked for the
    nonFederal customer, you come around full circle and end up
    raising the FSS prices for everyone.
        Mr. Allen. And no nonFederal customers, you're talking
    about Aetna or Cigna or Anthem Blue Cross or whomever?
        Ms. Bascetta. Right.
        Mr. Allen. Kaiser?
        Ms. Bascetta. Correct.
        Mr. Allen. And the foundation of that theory is that adding
    more people to FSS would actually reduce revenues for the
    industry. My point is it's a nonstatic world. There's an
    explosion in drug expenditures and pharmaceutical use?
        Ms. Bascetta. That's exactly right. It would reduce
    revenues for that segment of the market that the industry is
    dealing with and the belief is that they would--to make that up
    they would raise prices elsewhere.
        Mr. Allen. All right, thank you.
        Mr. Tierney. Mr. Shays.
        Mr. Shays. Thank you, Mr. Chairman. One of the reasons we
    have this panel is to identify and then we'll have our second
    panel, to identify what is it that they do right that we can
    learn from and what other things in the process of their doing
    what they're doing with pharmaceutical drugs can we learn, in
    general, about the industry.
        Ms. Bascetta, you identify four important factors that have
    contributed to reducing pharmaceutical spending by the VA and
    DOD. First, you say the two Departments have used formularies
    to encourage the substitution of a lower cost drug that is
    determined to be just as effective as a higher cost drug.
        Now the challenge we have in Medicare is--first of all,
    it's being paid for by the individual. But the challenge we
    have there is that you will have customers, patients, who
    basically if they're sick and they take one drug does 95
    percent of what another drug, they want 100 percent, even if
    it's three times as expensive. And they will clearly want that
    if someone else is paying for it.
        So I happen to believe that particularly if the Federal
    Government is going to pay for it, they should have some right
    to say what it's willing to pay for it.
        And I guess I would ask you, Dr. Sager or Ms. Waxman, will
    you be troubled if you were in our shoes and we designed a
    Medicare program that basically says we will pay for this drug
    at this price and we won't pay for this drug because we think
    this drug does almost as much and it's one third of the cost.
    Do you think that is the way that ultimately we might design a
    Medicare program, that we will pay for some drugs because we
    think they're almost as good and we'll pay a lot less and then
    let the consumer decide whether they want to pay all on their
    own or pay--or have the drug almost free? Comments, real short.
        Ms. Waxman. I'll make one comment.
        Mr. Shays. Keep your voice a little louder.
        Ms. Waxman. Many private companies do that kind of thing.
    It's a practice that's used very widely.
        What we have always said on behalf of the consumer is there
    has to be some way for the consumer to get that other drug if
    the doctor thinks it's really necessary.
        Mr. Shays. I think you have a breakdown. You're not going
    to be able to take advantage of what the VA does. Because the
    VA basically decides they're going to get one drug over
    another----
        Ms. Waxman. That's right.
        Mr. Shays. They get it for a lot less. And you're saying we
    can't learn anything from that?
        Ms. Waxman. I'm saying we can learn something and we can
    direct people to that lower cost structure, but I don't think
    it's tenable to say if in certain circumstances doctor thinks--
    you posed the example of 85 percent is good, just
    hypothetically. If the doctor says for this particular patient,
    that person really needs the 100 percent drug, there has to be
    some kind of mechanism or way to get that.
        Mr. Shays. We know that doctors basically, just in terms of
    lawsuit, even if they thought one was 98 versus 100, they're
    going to go with the 100 because they're not taking any chance.
        Ms. Waxman. There does need to be education of physicians.
    I think physicians need to be educated on looking at the drugs
    that can do just as well as relying on the manufacturers.
        Mr. Shays. I get your point. In other words, it's not
    obvious here.
        Yes.
        Mr. Sager. There are several choices. One thing they could
    do as physicians, you've got $1 million worth of drugs you can
    prescribe this year for your patients or half a million,
    whatever the appropriate amount would be. And you spend that
    money to do as much clinical good as possible for your patients
    because we have to balance it out somehow.
        Mr. Shays. Fair enough.
        Mr. Sager. That would give the people with the greatest
    information the choice.
        The other thing we could do is go to the person with the
    firm that's manufactured this valuable new medication that's
    much more expensive than saying what if we give you all the
    business, how far can you lower your price and recognizing that
    you will offset the lower price with much higher volume.
        Mr. Shays. Would you agree that one of the challenges is
    basically you're going to have to decide how much better is one
    drug over another? The government would be stepping into that
    process and obviously a difference between 185 might be too big
    a gap, but I have a feeling that sometimes we're really talking
    about almost a horsehair's difference between one and another.
        Mr. Sager. There may be a tiny difference in value and
    there may actually in real world be a tiny difference in cost,
    once you talk with the drug makers about how much does it
    really cost to make that pill?
        Mr. Shays. Ms. Bascetta, but bottom line, do you think we
    can learn a lesson from your Point 1?
        Ms. Bascetta. Yes, but I'd like to point out that in the VA
    one of the most significant differences is that the physicians
    work for the VA and so the VA has a distinct advantage of being
    able to influence their prescribing patterns from either
    restricting their choice for some of the drugs in the closed
    classes or for strongly encouraging and prescribing particular
    drugs in the preferred classes or in the formulary, whereas in
    the Medicare world----
        Mr. Shays. When you say ``preferred classes'' is that the
    100 percent versus the 85 percent? What do you mean by
    ``preferred classes?''
        Ms. Bascetta. Preferred class, a closed class is one from
    which the VA has a committed use contract. In a preferred
    situation they don't have that committed use contract, but the
    drug is on their formulary and physicians are strongly
    encouraged to----
        Mr. Shays. And the formularies, I view, as a laundry list
    of drugs that the VA buys?
        Ms. Bascetta. That's correct.
        Mr. Shays. Let me ask you again, you said DOD had some
    difficulty getting private providers to adhere to a limited
    formulary, in other words, that's----
        Ms. Bascetta. Yes.
        Mr. Shays. Explain what you mean by that?
        Ms. Bascetta. Thank you for asking me to explain that
    because that's where the analogy to Medicare comes in. In the
    Medicare situation in the DOD tri-care situation, you have
    private providers who are writing in the DOD case, about half
    of the prescriptions for the military beneficiaries. In the
    Medicare world, all of the providers would be private
    physicians and it's much harder in that situation for the DOD
    or potentially for CNS to exert influence over its providers to
    write for the drugs that are on the formularies. It becomes
    much more complicated, particularly if the beneficiaries are
    asking for different products than happen to be on the
    formulary.
        Mr. Shays. So that's an indication of trying to go to
    Medicare under this, then dealing with the private folks, that
    they seem less receptive to the formularies?
        Ms. Bascetta. That's right.
        Mr. Shays. Let me get to your point 2. You say VA and DOD
    have been able to effect different arrangements to pay for or
    purchase prescription drugs at substantial discounts. I don't
    really how that's different from 1. How is that different from
    1?
        And by the way, Mr. Musselwhite, sometimes a person who
    says nothing has got more to say because they have been
    thinking about how they would answer it. I'm going to allow you
    to jump in with Ms. Bascetta's permission any time you want to.
    Fair enough?
        Mr. Musslewhite. Sure.
        Mr. Shays. So feel free to respond. Ms. Bascetta, explain
    to me Point 2 how it differs from Point 1?
        Your Point 1 is formularies. Your Point 2 is are you saying
    are there other things besides formularies that they've been
    affecting employment, different arrangements to pay for it,
    purchase prescription drugs at substantial discounts. What are
    some of the other things you're talking about?
        Mr. Musslewhite. They are related, the different contract
    arrangements and the formulary, but because VA buys the FSS
    schedule, any drug that buys is going to begin--it's going to
    be less expensive than what others have purchased. That if in
    addition to that VA is able to identify a class, a particular
    drug that is either to be used all the time or merely all the
    time or is preferred, then it's possible to compete a contract
    for that drug and get even better price than FSS.
        Mr. Shays. The third one is you basically talk about the
    mail order process. And that seems like there would be
    significant savings. It would seem to me that would--one of the
    problems that we have been told is that the VA buy sin bulk,
    whereas Medicare is bought by individuals. But if you had a
    mail process, there would obviously be significant savings. The
    challenge, I guess, that some would suggest is that you're not
    sure who ultimately is using that drug that's mailed. You're
    also raising the question of whether the mail discontinues even
    when the person doesn't need the drug anymore. So maybe you
    could just tell me, do you believe, all four of you, do you
    believe that the mail order concept has a parallel to the
    Medicare program and does that illustrate a potential benefit
    for the Medicare program.
        Ms. Waxman.
        Ms. Waxman. I have to say quite frankly I don't exactly
    understand how the mail order saves money. It sounded to me
    like it was cheaper to send it out than have people come in and
    deal with a clerk and fill it that way. Is that correct or is
    there something else?
        Mr. Shays. Dr. Sager, why don't you respond and then we'll
    have Ms. Bascetta.
        Mr. Sager. I don't think the savings are very substantial.
    And also, you reduce the availability of community pharmacies
    to provide the medications that you need stat, pain killers,
    antibiotics, after hospitalization. They are covering their
    fixed costs on a smaller volume so they may have to raise their
    dispensing fees.
        Mr. Shays. Thank you. Jim.
        Mr. Musslewhite. The spending in VA is a dispensing cost
    and as we indicated in the testimony, the volume of
    prescriptions for pharmacists is much greater through the use
    of automation. These are refills for the most part. You get
    your first prescription at the clinic or at the hospital so
    that's where the efficiency or the cost savings----
        Mr. Shays. I would think that would be quite significant
    under those terms. You don't have dialog. You don't have--it
    almost can be automated, it would strike me.
        Mr. Musslewhite. In VA, it is automated. And it would have
    an effect on local retail pharmacies.
        Mr. Shays. Is there any study that you've done that is
    shown and Mr. Chairman, I think I've run over a little bit, is
    there any study that you've done that's looked at the negative
    and that is drugs being sent out because it was refilled and
    the person may have passed away or the families get it and just
    chuck in the mail because the person----
        Ms. Bascetta. I'm not aware of any studies that we've done
    on that issue. I believe that VA will tell you that they have
    pretty strict controls over their mail order operation, but
    that would be a good question to pose to them.
        Mr. Shays. Or to you all. Last point, last, you talk about
    the DOD joining forces and you mentioned VA has a much smaller
    list, over 1000 versus a much smaller number.
        Ms. Bascetta. 175.
        Mr. Shays. What is it?
        Ms. Bascetta. 175.
        Mr. Shays. 175, just basically quite a significant
    difference. But I would imagine that the DOD is using more of
    that 175, so it's pretty big volume stuff.
        Ms. Bascetta. That's correct.
        Mr. Shays. And so they are working together to get the
    purchasing of that?
        Ms. Bascetta. Yes, we believe they're making good progress
    in their joint procurements. Also, I might point out that the
    Congress directed DOD to expand its national formulary and they
    are working on that. They have a draft regulation that was
    issued in April to do that.
        In addition, with the expanded benefits to the retiree
    populations, there's more commonality now between the VA
    population and the DOD population.
        Mr. Shays. I'm just going to comment on something Mr. Allen
    that you said. I'm struck by the fact that when we allow a
    monopoly pricing, a monopoly sets it at the highest amount they
    get, they look at their marginal costs and they set the highest
    price they can get before they reduce sales so significantly
    that they get revenue or profit. So when they're looking at the
    lowest market, I think they're saying that market isn't buying
    anything or very little and they're going to price it in a way
    that gets them above their marginal cost and they're going to
    get some benefit, but they don't want to do it, they don't want
    to price their product in a way that others then start to argue
    that the market that is buying at the higher cost starts to say
    we want to pay less because there's a disincentive. So they're
    looking at both the economics, but they're also looking at the
    political issue of whether they start the price at less. Are
    they going to say that people can afford who are paying at that
    much higher price are going to demand that lower price and so
    they look at both the political--now they're beginning to see
    people that might want to set price and they're saying well,
    how can they take the air out of this movement so they're
    willing to take a little bit of a chance and show that they can
    sell to a lower income.
        But I don't look at it as mercenary--if it's mercenary,
    maybe I could. It's very logical to me and we, in government
    have said you have this monopolistic price because we're saying
    you can go out and spend a lot of money in research which is to
    just have shared a view that I don't know where it leads, but I
    just would want a response from you.
        I thank the chairman for his generosity of my time.
        Mr. Tierney. Following along that line, I think part of the
    problem we have here is this whole corporate climate right now
    where people are recognizing that most people in industry are
    by and large fair and honest and know that they're doing a good
    job, but that a number of people are greedy and not as
    scrupulous as we would like them to be and then we look at an
    industry that is particularly important to people right now and
    it seems to be price gouging and there's a reason to be
    concerned.
        Ms. Waxman, in your testimony, your written testimony, you
    talk about favorable tax refunds that the industry gets. And
    say that it does, in a sense, it encourages them to invest in R
    & D, research and development, but there's a question that the
    pharmaceutical company research dollars are funding. What are
    they funding that they demand high prices. They have a special
    tax exceptions for funding of research and development, but
    studies show that there are fewer and fewer new drugs that
    offer significant clinical improvements over existing therapies
    and we have a number of studies that recently show the industry
    has focused resources on developing knockoffs, so called ``me
    too'' drugs as opposed to significantly clinical improvements
    in drugs and instead use the money also to invest in marketing
    the existing products.
        With that in mind, and the fact that, as I mentioned
    earlier, the studies also show that total tax credits, that
    these companies are getting are significant. It's lowered their
    Federal tax rate from 35.2 percent to 17.1 percent, but we
    can't really tell how much of that is for research and
    development because they're all lumped in to a general business
    tax credit category.
        Ms. Waxman. Right.
        Mr. Tierney. I think the problem is people think they're
    getting away with murder and wondering why they're not being
    fair about this and seeing that the plan will obfuscate things
    so nobody can sort of catch a bouncing ball.
        Is there a way--do you think it would matter if we knew the
    exact amount of the tax credits that went to research and
    development, can we somehow separate that out on tax returns to
    give us an idea of how much of this tax credit is going into
    research and development?
        Ms. Waxman. Yes, absolutely. I think it would be a good
    thing to know how much is going for what and also to look even
    deeper into the issue of what are the drugs that are coming
    out.
        Mr. Tierney. That was my next question was going to be and
    would it also make sense to track just which of the drugs
    they're researching and developing are significant clinical
    improvements versus the knock offs and the so-called ``me
    toos.''
        Ms. Waxman. Absolutely. Unfortunately, what we're seeing
    now, for example, on the case of Prilosec where the patent is
    almost up. I mean sure we've all seen those ads for the new
    purple pill. The new purple pill is an improvement in that it's
    a once a day as compared to Prilosec which you have to take a
    few times a day. And I assume for some populations that is a
    significant improvement, but it isn't necessarily for all of us
    and that's the kind of new research that's being done mostly,
    unfortunately.
        Mr. Tierney. Mr. Shays raised an important point about
    somebody made a determination of which branded name, in this
    case, or generic in that case, which one should be prescribed
    if it isn't the 100 percent new one or to give the example you
    give, if it's the same thing, but it's given less times a day,
    who makes a decision that you go for the one that's less
    expensive as opposed to the other?
        Couldn't we set up an independent group? It doesn't
    necessarily have to be a government group, but a quasi-public
    group of very qualified people to make those types of
    determinations?
        Ms. Waxman. I assume that would be possible.
        Mr. Tierney. Ms. Bascetta, does that sound beyond reach or
    does it?
        Ms. Bascetta. No.
        Mr. Sager. Our plan calls for that, Congressman Tierney.
    And also, I think the pricing of new drugs should be
    commensurate with their value and with the risks that drug
    makers undertake, incur to develop the drug.
        Ms. Waxman. May I add one thing?
        Mr. Tierney. Sure.
        Ms. Waxman. There is a condition when a drug is--the
    research is done with Federal money, there is a condition in
    the statute that says the drug must be priced reasonable. No
    one has ever interpreted what reasonable means or ever enforced
    any particular definition of that term.
        Mr. Tierney. And that's in which statute?
        Ms. Waxman. In the tax credit statute.
        Mr. Tierney. It's my throwaway question for a moment, is
    this, suppose we condition a drug manufacturer's eligibility
    for reimbursement and the tax credits and their use of National
    Institute of Health money for research and development, suppose
    we condition all of that on manufacturer offering their product
    at the most favorable price that they offer any non-U.S./
    Federal entity, including other countries.
        Ms. Bascetta. The consumer would certainly benefit from
    that.
        Mr. Tierney. Anyone else?
        Mr. Sager. We then move toward one price for the same
    medication in every country, every wealthy country, and that's
    pretty close to the way things work for steel and bread and
    milk.
        If we want to mimic what the free market will achieve, we
    will see one price.
        Mr. Tierney. It's not a free market. Let's be serious on
    this. The NIH money owns 50 percent of what they get for
    research; tax credits, they're one of the lowest tax payers in
    the country; they get a patent. So I assume that none of us are
    laboring under the false notion that this is a free market.
        Mr. Sager. Absolutely and that's why I said mimic what the
    free market would achieve if we had one. I agree with each of
    your points, absolutely.
        Mr. Tierney. Ms. Bascetta, Mr. Musslewhite, do you have any
    closing remarks you want to make? Comment on that last
    question?
        Does anyone have any remarks they want to add as we wrap
    this up? Mr. Allen, Mr. Shays, any questions?
        Mr. Allen. No.
        Mr. Shays. No.
        Mr. Tierney. Thank you very much. I just always like to
    know is there anything that you all, that you stayed up last
    night preparing to answer that we never asked you? I mean that
    seriously. Is there any question you want to put on the record
    that you think has not been put on the record that needs to be?
        Thank you. In that case, thanks for coming here and
    enlightening us this morning. You've been very helpful. I
    recommend we take about 5 minutes and then we'll start with our
    second panel.
        [Recess.]
        Mr. Tierney. I think we'll get started on this second
    panel.
        First, I do have to swear you in as we do to everybody. If
    you would raise your right hands and stand.
        [Witnesses sworn.]
        Mr. Tierney. Thank you. Let the record that the witnesses
    have responded on the affirmative.
        Our witnesses on the second panel are Mr. John Ogden who is
    Chief Consultant to the Veterans Health Administration,
    Pharmacy Benefits Management, Department of Veterans Affairs.
    And our friend, Mr William Conte, Director of the Department of
    Veterans Affairs Medical Center in Bedford, MA who is a great
    friend of our Congressional District and the Commonwealth of
    Massachusetts particularly this area. He has worked with us in
    opening a number of community-based and outreach clinics and is
    a great ally to veterans in the area. We appreciate all that
    you do, Mr. Conte.
        Mr. Conte. Thank you.
        Mr. Tierney. Mr. Ogden, would you care to start? We're
    going to give you 5 minutes, but if that's too restrictive,
    we'll----
        Mr. Ogden. No, I'm going to paraphrase my statement.

      STATEMENTS OF JOHN OGDEN, CHIEF CONSULTANT, VETERANS HEALTH
      ADMINISTRATION, PHARMACY BENEFITS MANAGEMENT, DEPARTMENT OF
     VETERANS AFFAIRS; AND WILLIAM CONTE, DIRECTOR, DEPARTMENT OF
              VETERANS AFFAIRS MEDICAL CENTER, BEDFORD, MA

        Mr. Ogden. Mr. Chairman, and members of the committee, I am
    pleased to have this opportunity to address the significant
    accomplishments that the Department of Veterans Affairs has
    made since 1988 toward effective and efficient management of
    pharmaceuticals and I refer you to the attachment to this
    statement that reflects those accomplishments over the past 14
    years.
        The Department organizational element that has been and
    continues to provide leadership for these efforts is the
    Veterans Health Administration, Pharmacy Benefits Management
    Program. The mission of VHA PBM is to enhance the appropriate
    use of pharmaceutical in the veteran population. Easy to say,
    difficult to accomplish.
        The five major core functions of the PBM are utilization
    management, that is, development of pharmacologic guidelines,
    portions of clinical practice guides that include
    pharmacotherapeutics, a major part of our effort. No. 2,
    managing the distribution of drugs and related services. And
    Mr. Conte is going to talk about that in a few minutes.
        No. 3, managing the cost of pharmaceuticals. No. 4,
    developing and conducting outcomes research that we've talked
    about and heard about earlier this morning. And No. 5,
    education. That's education of patients and education of
    providers regarding pharmacotherapy.
        The business strategy for managing pharmacy benefits within
    VA is a simple one. Leverage national contracts are used
    whenever clinically possible in contracting for high volume,
    high cost pharmaceuticals. In addition, VA has a longstanding
    policy of using generic pharmaceuticals whenever they are the
    clinically acceptable choice. The contracting process is
    clinically driven with a goal of product standardization. The
    process is grass roots in nature, is driven by clinicians in
    the field, employs evidence based class reviews including data
    in the VA population where it exists and involves evaluating
    products and groups of products based on efficacy, outcomes,
    safety, compliance, VA patient needs and pharmacy factors.
        VA has been very successful in these types of contracts and
    other similar contracting strategies.
        Now I'd like to talk a little bit about utilization and
    expenditures. Our internal analysis inside VA shows that the
    increasing number of patients treated is the primary driver for
    increasing pharmaceutical expenditures in the veterans health
    system. In fact, when we analyze fiscal year 2001, 85 percent
    of the increase in outlays was because of new patients coming
    to VA and receiving pharmaceutical benefits. The increased
    utilization of pharmaceutical per patient or intensity of
    therapy and use of newer pharmaceuticals account for
    approximately 12 percent of our increase and 3 percent can be
    attributed to pharmaceutical or medical inflation, very small
    proportion of our increased outlays is caused by increased
    prices for existing products.
        While our overall outlays for pharmaceuticals has
    increased, the cost for a 30-day equivalent outpatient
    prescription over the past 43 months remains relatively flat,
    essentially a little over $13. This fact demonstrates that a
    managed formulary process can serve as the framework for an
    affordable robust drug benefit.
        Let me make a comment about a lack of a Medicare benefit
    and impact on VA expenditures. While it's difficult to quantify
    the impact on increased utilization and related expenditure
    pharmaceuticals due to the lack of a Medicare drug benefit, VA
    staff report anecdotal cases where dual eligible veterans have
    chosen to access VA for the drug benefit that is a part of our
    overall health care system. Some of these veterans indicate a
    desire to have VA serve as a pharmacy only. The Secretary has
    testified before the Congress and provided written comment to
    the Congress that VA should not be a pharmacy only, nor do we
    believe that Congress in enacting provisions of Title 38
    contemplated that VA act only as a pharmacy.
        We believe that when such veterans become aware of the
    positive patient outcome associated with VA's continuum of care
    delivery model and to safety and health risk inherent in a
    fragmented pharmacy-only benefit, they will want their care
    coordinated and managed by VA health providers.
        From a financial and clinical perspective, the important
    lessons learned from VA's experience concerning pharmaceuticals
    is that effectiveness and efficiency can be achieved when
    providers who treat patients are actively involved in formulary
    decision when best clinical practices are employed, when volume
    based and committed use contracting are used when clinically
    feasible and when clinical pharmacists are fully integrated
    into the medication use process.
        In conclusion, VA has many lessons learned to share in the
    area of drug contracting, drug utilization management, drug
    distribution and achieving positive clinical outcomes from drug
    therapy. While significant milestones have been reached in
    achieving cost avoidance through contracting activities within
    VA and jointly with the Department of Defense, even greater
    cost avoidance has been achieved by identifying and encouraging
    best practices, developing and promulgating drug treatment
    guidelines and through recognizing the value of pharmaceuticals
    in the treatment of diseases. It is gratifying to know that our
    cost avoidance efforts have been accomplished while improving
    the consistency of drug therapy across the VA health care
    system. Indeed, as a result of our clinically driven cost
    avoidance efforts, VA has been able to partially offset the
    cost of providing care to the large number of veterans enrolled
    in the veterans health care system.
        This completes my statement and I'm prepared to answer
    questions.
        [The prepared statement of Mr. Ogden follows:]

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        Mr. Tierney. Mr. Conte.
        Mr. Conte. I want to thank you for that nice introduction
    and I want to thank the chairman and members of the committee
    for the opportunity to testify on ``Lessons Learned by VA'' and
    for providing an effective and efficient management of
    pharmaceuticals. The key component in providing these services
    has been the creation of the Consolidated Mail Outpatient
    Pharmacies. This is a service we provide for our veterans, to
    provide timely, accurate and cost-effective mail out
    prescriptions.
        Mr. Ogden highlighted the entire Department's success and
    the overall pharmaceutical management program. I'd like to
    concentrate on the CMOP production concept and its ability to
    deliver these cost-effective services to the veterans we serve.
        It's pretty tough to do in a very short period of time, but
    first, I'd like to explain the CMOP operations. These systems
    are really quite unique and complex. A CMOP is a Federalized
    operation utilizing a assembly line techniques, robotics and
    software interfaces and automated filling systems to produce an
    accurately filled prescription with an acceptable
    pharmaceutical practice and packaged for delivery. And along
    with that good management practices to include inventory
    management, quality assurance and accounting practices and
    these are all the core of that operation. Patient specific
    information is sent daily from the individual facilities or we
    call them host sites to the CMOP via a software interface. The
    CMOP processes the request and mails the package containing the
    prescription to the veteran. All labels and patient information
    reflect the host facility, not the CMOP information, which
    makes the entire CMOP process transparent to the patient. It is
    as if the prescription were mailed from the host facility. One
    could view the operation as a vending service for the host
    facility. Information on cost, lot numbers, dates of fill,
    everything is electronically returned to the sending station
    upon completion of the order and placed in the patient's
    electronic medical record.
        Next, I'd like to underscore a few of the critical elements
    that were addressed by the VA over a long period of time to
    make this happen. And we've heard this before: creation of a
    national formulary. A strong commitment to provide appropriate
    drugs for use by the local medical staff with an emphasis on
    best value was historically predominant in all VA hospitals. In
    1992, the VA created a national utilization data base of actual
    dispensing actions system-wide. This forms the basis for
    national contracts for high volume, high cost pharmaceuticals.
    I mentioned our current Secretary was the Under Secretary at
    the time when we did this and this was really a major
    initiative in the VA.. The VA National Formulary system is a
    product of centralized coordination of grass roots process,
    which reflects evidenced-based medicine at the patient/provider
    interface.
        Next came along the computerized pharmacy software. The VA
    clearly, currently possesses the most sophisticated automated
    medical record system I think in the country, in most
    countries. Standardized software gave the VA the opportunity to
    link these facilities to these CMOPs and we can download these
    prescriptions to the CMOPs in minutes. And Bedford currently
    downloads data from 50 sites across the Northeast.
        Then came the national contracting of pharmaceuticals and
    use of generics when efficacious, has been a contributing
    factor of holding down overall drug costs. Without this
    national approach, we'd not be able to achieve these results.
    Use of national contracts and a strong, clinically based
    National Formulary allows local medical centers to maximize the
    utilization of resources. As John referred to earlier, we can
    take those resources and maybe buy staff.
        Creation of the CMOP operation was another key milestone in
    us being able to provide this as centralized highly automated
    prescription operation. The first systems were in Bedford, Los
    Angeles and Leavenworth. The new system fills 60,000, 80,000
    prescriptions a day. We're currently filling 26,000 to 28,000 a
    day.
        The national average CMOP dispensing cost, that includes
    light, heat, this is truly a business operation within
    government. It's about $2.15 a day per prescription. That
    includes everything, plus the cost of the drug. So you're
    looking at--except for $2.15 a major savings.
        Another significant factor the VA looked at was the
    creation of a prime vendor concept. This enabled us to order
    drugs just in time, reduce our inventory. CMOP currently in
    Bedford turns its inventory over 60 times a year which is an
    amazing factor. You're looking at a couple million dollars a
    day that comes in and out of that place.
        So with that kind of coordinated ordering, we've been able
    to do a lot of things to drive our costs down.
        Mr. Tierney. That was a day you were talking about?
        Mr. Conte. Yes, a day. This brief description of CMOP, I'd
    like to highlight a few advantages. This coordinated system
    decreases error rate. This is a totally bar coded system and
    it's got numerous balances and checks in it. CMOP was
    accredited by the Joint Commission on Hospitals. It received a
    100. There was a maximization of pharmacist expertise at the
    facility because we have taken the burden of filling these
    prescriptions away from the facilities. This has enabled the
    facilities to put pharmacists on the front line and have them
    interface with a clinical staff which is a key component to
    holding your prices down because they can then interact with
    the clinical staff and pick the best drugs with them.
        Maximization of production of staff. Right those
    pharmacists in that CMOP fill between 1500 and 2000
    prescriptions a day. Meeting demands for service, I don't think
    without that we could recruit enough pharmacists in the
    Northeast to keep the operation going with the workload we've
    got, so because we've automated, we've been able to do that.
        In summary, there's five things, six things or five things
    we really do: an extremely efficient system for the effective
    clinical review of pharmaceuticals; a distribution system of
    pharmaceuticals of CMOPs; a data system which is your software
    interface; a method to procure pharmaceuticals nationally and
    the software necessary to effectively enable the coordination
    of these efforts.
        Thank you for your time.
        [The prepared statement of Mr. Conte follows:]

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        Mr. Tierney. Thank you for your testimony.
        Mr. Allen, why don't we ask you to go first?
        Mr. Allen. Thank you, Mr. Chairman. Thank you both for
    being here.
        Mr. Ogden, let me begin with you. I've heard so much about
    PBMs and how now Medicare benefit program could be designed
    with private sector PBMs to be operating the program, that it's
    nice to hear about a Veterans Administration PBM, even though
    it's a little different, but you're not contracting that work
    out to a private entity, I take it?
        Mr. Ogden. No sir, we are not.
        Mr. Allen. You do it in-house?
        Mr. Ogden. Yes.
        Mr. Allen. Tell me in connection, you facilitate this
    national formulary process. In the private sector, of course,
    formularies are a key component holding down costs to the major
    buyers of prescription medication in this country, the major
    insurance companies, for example. And I was wondering if you
    could describe a little bit of the interaction between the
    industry and your organization as industry tries to get one of
    its drugs on a formulary and you try to evaluate the
    comparative effectiveness of drugs, how does that work?
        Mr. Ogden. I'll try to be succinct. I'll try to speak a
    little louder. This is a long story. Formularies in the VA go
    back, at least as far as I can determine, back to the early
    1950's. I've seen a copy of the formulary dated 1951, so I can
    make that statement.
        And I've got to tell you, up until about 10 years or so
    ago, I did not believe that we could move to a national
    formulary in our organization and the reason I believed that is
    because we have these affiliations with the medical schools
    across the Nation, that local practice customs would prohibit
    us, because of those two factors and ever moving to a national
    formulary.
        As Mr. Conte indicated, when Mr. Principi, our present
    Secretary was the Deputy Secretary back in the early 1990's, he
    used to ask me repeatedly, what is happening the VA health care
    system? And my comment would be we all have to go to Austin. We
    would have to meet an army of people and we could give you a
    snapshot after working feverishly for many, many, manhours and
    come up with a picture at that point in time and that would be
    the best that we could do.
        With his support, we established the National Drug
    Utilization Data base which captures the actual dispensing
    actions across our systems and we collect and collate and
    analyze that data in Chicago and in my offices in Chicago. That
    step, that program change has helped us change our mindset and
    allowed us to move toward the national formulary. When Ken
    Kaiser, our former Under Secretary for health came on in 1994,
    1995, one of the first questions he asked me was why don't we
    have a national formulary? I explained our situation, the
    historical issue, the cultural issues, the different medical
    school affiliations, etc., and he said I want a national
    formulary and I want it next week. I said well, boss, it would
    be better if we kind of do it in a timed approach if you will,
    a tiered approach as opposed to going right to a national
    formulary. So what we did was we went to Network, the 22 VISN,
    the Veterans Integrated Service Network first in 1995, 1996. A
    year later, we went to the national formulary and the key here
    for us again is that data base and that grassroots involvement.
    People in Washington don't make decisions about the drugs that
    are used to treat veteran patients. The people who make the
    decisions are two groups, basically. The first group is what we
    call our medical advisory panel and that's a group of 12
    physicians who are field-based. They see patients. One of those
    12 physicians is a Department of Defense practitioner. The
    second group that makes decisions is our VISN, our network and
    formulary leaders. These are individuals who are agents, if you
    will, of the network director regarding pharmaceutical matters
    in the particular VISN and a subset of that group is the number
    of clinical pharmacists who work in my office who do most of
    the staff work to prepare an issue for debate by the Medical
    Advisory Panel and the VISN formulary leaders. So those two
    groups make the decisions. So it's grass roots. It reflects the
    care that is being provided veterans.
        I know the title of this hearing concerned lessons learned
    in our drug procurement. It's really not drug procurement. It's
    lessons learned in managing a benefit. And as I said in my
    statement, yes, we have been very successful in contracting,
    but that's not where the return on the investment comes. The
    return on the investment comes in being an aggregate of all of
    the factors that we would describing including one Mr. Conte
    described in how we distribute drugs, but the use and
    embracement, if you will, of those clinical practice guidelines
    and those pharmacologic treatment guidelines by our providers
    has to be one of the foremost factors in why we've been
    successful.
        So the formulary is important, absolutely important. It's
    driven by what's actually happening out there at the front
    line.
        Mr. Allen. When you say it's driven by what's actually
    happening, you're talking about patterns of prescribing by the
    VA physicians in the field.
        Mr. Ogden. Yes.
        Mr. Allen. What is the role of the outcomes research that
    you referred to in your testimony? What kind of research is it?
    How does it use--does it get to the kind of research I
    mentioned before the earlier panel and just by way of
    background, let me explain that for one moment. Right now for
    drugs to get approval from the FDA it has to be proven that it
    is safe and that it is effective, that is, it treats the
    condition for which it is being prescribed. The two missing
    components are how comparatively how effective it is to other
    drugs on the market, No. 1, and No. 2, is it cost-effective?
    That is, does it treat the condition for which it's prescribed
    in a way that makes financial sense to whomever is paying the
    price. So my question to you is with that said, can you talk
    about your research, your outcomes and how, if at all, what
    your research is connected to the formulary and the decisions
    about the formulary?
        Mr. Ogden. Our intent is exactly what you just described.
    Our efforts inside the PBM regarding outcomes research, those
    efforts are in their infancy, but I can tell you that our
    colleagues in the research portion of VA are very interested in
    this issue as well and we get more and more interest in
    conducting these types of studies as time goes on and as the
    outlays for pharmaceuticals increase.
        After we are absolutely interested in head to head studies
    inside therapeutic classes where these kinds of questions are
    being asked by our providers and by our managers and in some
    cases by our patients, let me just come over here to the chart
    that you have over here. On the right hand side of that chart
    you show two drugs, Prevacid and Prilosec and a few years ago
    when we decided clinically that one of those two drugs would
    meet the clinical needs of most veteran patients we
    competitively bid them with the idea in mind that marketshare
    would go to the formulary listed produced.
        I'm going to tell you at the time, the drug on the right,
    Prilosec which has the generic name of omeorazike, it had 97
    percent of the marketshare in the Department. They lost.
    Prevacid received the bid. Because that happens to be a
    therapeutic class----
        Mr. Allen. Excuse me 1 second, Mr. Ogden, did they win the
    bid on a lower price or something else?
        Mr. Ogden. Yes, they did. They won the bid on a lower price
    because we determined clinically that they were both
    efficacious. They delivered similar clinical outcomes, so cost
    becomes a greater consideration. You can't say that for every
    drug or every class of drugs, but in this case there were only
    two drugs at the point in time and we made that clinical
    decision. Based on the evidence that was available, not only in
    the United States but worldwide at the time.
        Well, as I just indicated, Prilosec had 97 percent or 98
    percent of the VA business at the time. They lost the bid. This
    happens to be a class of drugs where again, clinically, they
    produce very similar clinical outcomes. So to convert patients,
    you don't have to titrate the patient. You can just make a
    conversion which is what we did.
        The turnaround in market share from Prilosec to Prevacid,
    the generic name is Lansoprazole, was almost overnight, almost
    overnight. Again, that doesn't happen in every therapeutic
    class that we made that decision, but Prilosec's marketshare
    went like this. Lansoprazole's market share went like this. And
    obviously, the veterans that we treat benefited because we can
    treat more veterans because we're treating veterans who used
    this product and it is a highly prescribed product. It allows
    us to treat more veterans. So that happens to be a good
    example. You can't do that in every class of drugs or with
    every drug, but when we can do it, we can make a clinical call,
    we will do it and do do it as evidenced by the successes that
    we have demonstrated over the years.
        Mr. Allen. Thank you very much.
        Mr. Tierney. Mr. Shays.
        Mr. Shays. Mr. Ogden, just refresh me. You're a consultant
    to the VA, not an employee?
        Mr. Ogden. In statute, I'm the Director of Pharmacy
    Services for the Department, but in the re--reformation, if you
    will, the reinvention of the veterans health system in 1995,
    they changed the title of people like myself, Director of
    Nursing, Director of Optometry, Director of Prosthetics to
    Chief Consultants. So I had been the Director of Pharmacy
    Services by law, but our title is Chief Consultant.
        Mr. Shays. I think that's weird. [Laughter.]
        Mr. Ogden. We can talk about that. That would probably take
    a couple of hours.
        Mr. Shays. OK. See I think of consultants as having less
    authority but getting paid more.
        Mr. Ogden. I'm a Federal employee.
        Mr. Shays. Fair enough. That's why I asked the question. I
    want you to help sort out a few things. The Department of
    Veterans Administration charges $7 co-pay and that the average
    cost per veteran in the 30-day period is $13.50.
        Mr. Ogden. Ingredient cost, yes.
        Mr. Shays. Pardon me?
        Mr. Ogden. That's ingredient cost. I neglected to say that
    $13 is a cost of the drug ingredients, not any labor, not any
    other--it's just the cost.
        Mr. Shays. It's the cost of the drug?
        Mr. Ogden. Yes.
        Mr. Shays. That surprised me. I thought it was going to be
    higher. I think it's going to have to change significantly
    because what I've seen in my part of the country, the greater
    New York area, it's still part of New England, closer to New
    York, I've had some very well to do constituents telling me
    almost with some bit of embarrassment that they are joining the
    VA system to get prescription drugs because they feel like they
    are taking $300 a month and throwing it in the waste paper
    basket by not taking advantage of it because they say their
    drug costs are hundreds of dollars and for a small co-payment
    they can buy into the system. But they have the ability to pay
    it on their own. They're fairly--I come from a fairly--overall,
    they have the ability to pay for it.
        And so is there anything statistically that you had that
    tells us that $13.50 cost is going to go significantly--because
    frankly they're not pulling in my wealthier constituents are
    going to save $7 a month. They're coming in because they can
    save hundreds of dollars a month. So is there any projection
    that $13.50 goes to $26.50 goes to--over a short period of
    time?
        Mr. Ogden. I don't think it's going to go in a short period
    of time. It's going to increase dramatically. I think we can
    all expect that the average price is going to increase for a
    lot of reasons.
        Mr. Shays. What that says though is that veterans pay half
    the cost.
        Mr. Ogden. But that $7 co-pay does not include--I think by
    statute does not include any amount. The $7 is for the
    ingredient cost.
        Mr. Shays. So the $7 is basically the--well, how much, if
    you looked at costs, how much of the $13.50 represents the full
    cost?
        Mr. Ogden. You mean labor, depreciation, etc?
        Mr. Shays. The full cost of providing the service. Tell me
    we know that cost.
        Mr. Ogden. Pardon me?
        Mr. Shays. Tell me we know that cost.
        Mr. Ogden. I'm going to tell you it's probably under $13,
    under $20.
        Mr. Shays. Do we know how much it costs to provide a
    prescription service to our veterans, the total cost? If we
    don't know, tell me, but----
        Mr. Ogden. I think what I told is pretty representational.
    We know that the average ingredient cost for a 30-day supply is
    right around $13.
        The cost to deliver that product, including this facility,
    the CMOP facilities and the up front processing is another $7.
        Mr. Shays. How do you know that?
        Mr. Ogden. Its cost on average $2.50 to process a
    prescription. That includes the mailing costs, all the
    overhead, everything to run those facilities.
        Mr. Shays. The employees?
        Mr. Ogden. Yes. The professionals involved, the
    pharmacists, the technicians, the lights, the overhead.
        Mr. Shays. So basically you're saying that the entire drug
    costs is paid for by the government?
        Mr. Ogden. Yes, for the veterans who are accessing our
    system for service connected. There is no co-pay as you know.
        Mr. Shays. You were generous. I wasn't aware of that. There
    is no co-pay for the service connected.
        Mr. Ogden. Let me back up for just a second. If, in the
    Department, the pharmacy co-pay is not the type of co-pay that
    you or I would pay in an outside--those co-pays are generally
    based upon generic, brand, formulary, nonformulary. When
    Congress that legislation back in the early 1990's, the co-pay
    was based on eligibility. So if a veteran was rated 50 percent
    or greater service connected, they pay no co-pay, whether it's
    drugs or otherwise.
        Mr. Shays. Mr. Conte, do you agree that the nonmedical, the
    nonprescription sole cost is $7?
        Mr. Conte. It's pretty close. I know that $2.15 is right on
    the target because the CMOPs have costed it very, very
    effectively. As far as the balance of that $7, that would
    depend on each facility and what the staff is. So John has a
    good handle on that. He's darn close.
        Mr. Shays. It's hard for me intuitively and sometimes when
    I bring my intuition it gets me into trouble. But intuitively,
    based on moccasins that I wear, it strikes me that your costs
    have got to go up significantly--well, first off, we're
    allowing queuing and if you're in the line, you may not be part
    of the system. So let me just parenthetically ask how many
    people are waiting to be part of the pharmaceutical program in
    Massachusetts?
        Mr. Conte. In Massachusetts, I think the last figure we
    looked at was around 3,000, but these tend to be categories
    that are nonservice connected.
        Mr. Shays. Right, and I predict to you that they're the
    ones who a good number of them will be the ones who are joining
    because they see significant savings. And I don't believe that
    they are going to go through the hassle of joining the system
    if they're just going to save $75 a month--excuse me, $13, a
    net of $7 a month. I think they have to basically see that
    there's significant savings by joining.
        Mr. Conte. I think what they're doing now is paying to a
    large amount their prescriptions through the private sector and
    they're coming in and paying $7 also.
        Mr. Shays. But the cost to you will not be $13 per average.
    That average cost will go up significantly.
        Mr. Conte. That's a tough thing for me to answer. If a drug
    costs $50 and we pay $50, you're right. They're paying $6.
        Mr. Shays. Do you want to say something, Mr. Ogden?
        Mr. Ogden. Yes, I was just thinking about your question and
    if a nonservice-connected veteran presented with a prescription
    written by a private doctor, we would simply fill that
    prescription, the cost could go up significantly, if that
    prescription was for an item not in a formulary process. It was
    for an item in our formulary process, then, in fact, it could
    be the--the price wouldn't go up because it would be--that's
    the average--those are the problems we use to dispense to all
    veterans who currently access our system.
        Mr. Shays. But frankly--right, and the formulated would be
    they buy this drug. No, but they don't care--does the veteran
    care if it's in the formulary or not because they still get the
    drug at just a co-pay cost. You care, but the veteran doesn't.
        Mr. Conte. Yes, they do. Veterans in our system realize
    that the pharmacy benefit is, in fact, an integrated benefit as
    far as VA providing health care.
        Mr. Shays. Let me just interrupt, just so I can follow the
    rest of your--I make an assumption that when a veteran goes, if
    he needs the drug that's not in your formulated list, they're
    entitled to that drug?
        Mr. Conte. If the veterans is enrolled for care and he
    presents and the physician orders that drug that doesn't happen
    to be on our formulary, we do provide that drug.
        Mr. Shays. Sorry to interrupt you.
        Mr. Conte. Let's don't discount here the power of direct
    consumer advertising. When the patient is sitting home watching
    the evening news and they see every commercial has to do with
    the purple pill or for arthritis of the knee, etc., what do you
    think happens when they present in the exam room? They mention
    that commercial to the provider and for those veterans who have
    not been in our system very long, it's hard for them to
    appreciate that the pharmacy benefit is an in-bred part of our
    health care delivery system. We do have a formulary process and
    we do analyze products and we do when the evidence suggests and
    that's the type of product we use.
        Mr. Shays. But that's irrelevant to them.
        Mr. Conte. It's irrelevant to them. It's hard for them to
    understand.
        Mr. Shays. All I'm saying to you is that your point is well
    taken. If they get the formulary product, it is going to be a
    lot less. They say it's not a big cost to you because you got
    it at a lot less, but maybe this should be my last question, I
    see my red light, how much of your products end up being
    formulated and how much aren't? In other words, when you add up
    all what the veterans bought, how much is formulated and how
    much----
        Mr. Ogden. I don't have the figures of what we bought, but
    I can tell you what that is in the context of what we dispense.
    Last year, in fiscal year 2001, we dispensed approximately $98
    million prescriptions, actual prescriptions. Of those $98
    million, approximately 90 percent or 91 percent were for items
    listed on the VA National Formulary.
        Mr. Shays. Let me ask you one last question. Of that 91
    prescriptions, what was the cost? Was it 91--it wouldn't be.
    The 9 percent remaining, not part of formulary turned out to be
    how much of your expense.
        Mr. Ogden. Let me just finish by saying another 6 percent
    is listed on our network or VISN level formulary, so when you
    have 3 or 4 percent nonformulary, you use--the nonformulary
    use, as far as a percent in dollars, of total outlays would be
    insignificant.
        Mr. Shays. It would be interesting to know--I mean I think
    this is great news, but it is surprising to me. My prediction
    intuitively would be that 3 percent will start to soar, but I
    could be wrong and if it doesn't, then we are truly on to
    something quite significant.
        Mr. Conte. I will tell you there are challenges and Mr.
    Allen asked a while ago about the interface between the
    industry and ourselves. It really should be about the interface
    between the industry, ourselves and you all just because we're
    a public institution. And that interface is constant and when
    we make these decisions in some cases we have for lack of a
    better way to put it, winners, and you have perceived losers.
    They are not happy about that. The ones who don't have the
    formulary listing, if you will. So it's a constant--maybe what
    I really want to say is a tug of war.
        But I think as long as we're patient, we have been
    validated by the Institute of Medicine. We have been validated
    in our process that Cindy mentioned from the General Accounting
    Office. Again, it's a public institution. What we're trying to
    do here is to do the best we can----
        Mr. Shays. I get that. Let me just say to you, it strikes
    me and thanks, Mr. Chairman, for having a long red light, but
    it strikes me as a very positive story and it's--I'm grateful
    one member of the press is here, but this is a story that more
    people need to hear. They're hearing a lot of negative stories.
    Thank you.
        Mr. Tierney. I think all the Members here share the idea
    that what we really want to do is get the information and we
    don't really care who asks the questions, as long as we get
    answers, the credible answers that you're giving.
        Mr. Ogden, can you envision this type of a process that you
    have at VA being enlarged to cover a larger population to
    include Medicare people?
        Mr. Ogden. I have thought about this a lot and I don't
    think it has to be a Federal program for Medicare to be
    successful and I'm going to digress a minute here, but I've
    spoken to Mr. Allen in the past and his staff in the past, for
    example, linking Medicare pricing to be a pricing and we have,
    as the Department testified, that's not in our interest to do
    that and as Cindy mentioned, the GAO has looked at that. The
    reason that we feel that way and it's not because we're
    parochial, we're trying to just provide a service to veterans
    and everybody else who doesn't get that opportunity is because
    when you think about the population, the size of the Medicare
    population and we're all going gray, that Medicare has the
    potential to achieve much greater pricing than we do. The VA
    and DOD combined, the Coast Guard and Indian Health Service for
    that matter, I think we comprise like 3 percent of the U.S.
    market in terms of outlays. Medicare is huge. The current
    population in Medicare, I think it's like, the dollars out
    there now are like 42 percent. And it's just going to get
    greater as the boomers age. But I think that again, Medicare
    through emulating the kinds of strategies that we have emulated
    that they can get far better pricing than we receive. And I'm
    going to go back to this example here. If Medicare can deliver
    the marketshare and that's the key, it's what was mentioned
    earlier, what will the market bear? If Medicare can deliver the
    marketshare, they will, in fact, receive better pricing. But
    another key area is the patients, of course, when the patients
    buy in, they get total free choice, because they get total free
    choice about all drugs and all drug facets that causes--it's a
    higher price.
        Mr. Tierney. What if they put together a formula in process
    much like the one that you've got?
        Mr. Ogden. I think it could work and as long as we've got
    the providers, the physicians in this part of the country to
    make those decisions and drive it, it can work and it can work
    very successfully.
        Mr. Tierney. But you need a data base?
        Mr. Ogden. And that's where the Department comes in and
    services the public good and the patients we treat are very
    geriatric. They're mostly male at this point in time, but there
    are a greater number of female patients that we're treating,
    but we have an excellent research and longitudinal, if you
    will, research base that can demonstrate people like
    yourselves, the types of public policy that will best serve in
    this case, the Medicare population and affordable cost. I think
    the difficult thing for us and Mr. Shays mentioned our costs
    are going to go and everybody's costs are going to go up is
    we're sitting here today, and pharmaceutical outlays are going
    up. But I don't think anyone will argue that pharmaceuticals
    aren't a good value. Because we all know they are a good value.
    The problem for all of us is with pharmacogenetics and genomics
    and biotechnology is the percent of our health care dollar that
    we outlay as a society for pharmaceutical has the real
    potential, in a very short period of time to climb
    dramatically. This is going to involve all of us to design a
    system that integrates pharmaceuticals much more so than we
    have up until this point in time.
        Mr. Tierney. Excuse me, it seems like an interesting
    exercise would be to have somebody who does just that, design a
    system that could be laid over the Medicare population using
    what we've learned from the VA in setting it up and plainly is
    the direction to go. And I would suspect whatever cost that
    would be to do that design and get everything ready to go would
    be reasonable to consider what the benefits in the long run
    would be and maybe that's something we can all think about up
    here.
        Mr. Conte, I'm curious to know your consolidated outpatient
    mail pharmacies, that network, how would you compare your CMOPs
    to the distribution systems used by private sector people like
    Pharmco, Merck and Expresscrips?
        Mr. Conte. Well, you know, they all visited us. I think
    we've been the model for that as far back as the early 1990's
    and I think we have some significant advantages in that we use
    technicians more than they do in the private sector and we've
    been able to automate our system using technicians and
    maximizing the pharmacy output. I can't give you exact figures,
    but I know our pharmacist to technician ratio is very different
    than what you see in the private sector. It's still a very
    accurate system because of bar coding the way we support those
    pharmacists.
        The system itself has got a history of being extremely cost
    effective versus those companies you mentioned. I have no
    figures on their actual cost, but we've seen their operations
    and they tend to have a lot more pharmacy staff and a lot more
    of staff than we do. I think the VA has demonstrated
    unequivocally that it's been able to produce the most cost-
    efficient mail out system for pharmacy. It's a service that we
    provide. The clinical aspects are sort of linked, the host
    facilities. We can't just mail it out. This is linked with
    those facilities on the clinical side.
        Mr. Tierney. How long did it take the VA to get its
    architecture for this pharmaceutical program together from the
    concept to actually implementing it where you get to the point
    where you're comfortable and you feel that you're getting the
    maximum benefit from it?
        Mr. Ogden. The architecture has been in development during
    the past 12, 13 years or so. It's an evolving architecture.
    These facilities that we have are in laboratories and for
    example, Bill mentioned what the capacity of the current
    Bedford facility is and by the way it was one of the first
    generation facilities.
        I was just in Chicago Thursday and Friday and they just
    added some technology at the Chicago facility and they
    anticipate, when it's debugged, that they'll be around 25,000
    prescriptions per day. It's evolving not only in VA, but it's
    evolving in the private sector as well. Merck has some very
    excellent technology. Our people have been into their plant in
    New Jersey and have looked at it and it's very good, we all
    have very good technology, but it's an evolving situation. I
    think that ours is totally different than what you'd see in the
    private sector because we're a mail service pharmacy, not a
    mail order pharmacy.
        Our intent was to have the patient talk to the doctors,
    nurses, the pharmacists, etc., when they access the VA system.
    What we designed over here far, far away, if you will, is an
    economies of scale distribution facility to maximize
    productivity dispensing the actual prescription. I have to give
    you credit to our IT people, information technology, people.
    Think about moving massive amounts of patient data day in and
    day out. We hand it off to commercial software processes who
    fills the prescription. We hand it back to put it back over the
    wires and we print the patient's medical record. It's
    absolutely phenomenal what our IT people have done over the
    past 12 years. It's evolving. It's a very good success story.
        Mr. Tierney. If we supposedly thought about setting up a
    parallel system for Medicare patients and we wanted to learn
    what you were doing and we decided we're just going to take and
    replicate what you've done using what benefits we think we
    would learn on that, set it up with the Medicare and move
    forward, what cautionary notes would you give us on that?
        Mr. Ogden. Well, I think my primary cautionary note was it
    has to be gradual. If for some reason we decided to make a
    national decision what the formulary was, I don't think it
    would be successful.
        Mr. Tierney. How do you envision that a grassroots
    operation----
        Mr. Ogden. I'm a proponent of allowing States to form
    consortiums.
        Mr. Tierney. To do what?
        Mr. Ogden. Allowing States to form consortiums or a State
    like Maine that doesn't have a big population, if you will,
    with regards to New York, could partner with large other
    potential buyers and so that when they did determine what a
    formulary was, that they could actually affect better pricing
    in the marketplace just because of the numbers. So I think
    that's the key. I don't think we're ready for a national
    program under--and I'm not saying I'm a proponent--I'm
    obviously talking for myself and not for the Department.
        Mr. Tierney. Right.
        Mr. Ogden. We're not a proponent of that. Again, our whole
    process has been in effect since 1995. We've been evolving this
    process. The buy-in is superior to the buy-in yesterday,
    superior to the buy-in 6 years ago. And we don't bat 1,000, but
    we're batting pretty good and it causes me to appreciate that
    unless it's grass roots, it won't work.
        Mr. Tierney. I have some legislation that basically would
    give States, grants to States or regions to devise a system by
    which they could deliver health care services and then a second
    grant if they did that would let them implement that. Of
    course, part of that would be dealing with prescription drugs
    and there are some State efforts, particularly here in New
    England, where people are looking to have consortiums with
    States that do just what you're talking about and so there's
    nothing that you see that would stand in the way of doing
    what--state consortiums, getting together and deciding that
    they're going to establish formularies, maybe model it in a way
    that you've done yours and then go about their business in that
    respect.
        Mr. Ogden. I would certainly like to see that.
        Mr. Tierney. Well, maybe we'll hear some of our
    gubernatorial candidates talk about it.
        Mr. Conte, do you agree with that assessment, that it's
    worth it?
        Mr. Conte. Absolutely. I'm sitting here as John as talking,
    it really comes down to getting your providers on board because
    they're the ones who are actually going to do the prescribing
    and getting the software up and going, a formulary and an
    automated process, and that's what we've done.
        Mr. Tierney. Mr. Allen, any more questions?
        Mr. Allen. Just a couple, some comments. I'm struck by how
    much, at least up here, how much progress we've made during the
    course of this hearing. I hear two things that seem to me of
    great significance. Aside from the fact that VA has got a
    system that is moving along and that really does shed some
    light on where we're going. One of the points is and this is
    not acknowledged in the debate over a Medicare prescription
    drug benefit by either side of the aisle. One is that if you're
    going to save money, you need to do it as the private sector
    does and as the Veterans Administration does and accept the
    formulary. This is something that those who want a Medicare
    prescription drug benefit based on the insurance industry and
    the private sector say they don't want to go close to that and
    on our side of the aisle people say you can get any drug you
    want under our plan, any drug you want. Again, a rejection of
    the formulary.
        The second component is that if you have a formulary in
    order to hold that price, you have to have an independent way
    of doing the research that will allow you to conclude that
    Prevacid and Prilosec are equivalent effectiveness and without
    that research capability you're basically sunk and it has to a
    research capability that is not tainted by the pharmaceutical
    industry itself. And so to me what you've been saying is very
    helpful in sort of shaping that conclusion.
        I want to give you both a chance to say is there anything
    that I've said that concerns you, troubles you or is
    incomplete? That was an effort to summarize sort of how, where
    my mind has been going as a result of what you've been saying
    and I don't want to take away a lesson that you didn't mean to
    convey.
        Mr. Conte. I think that we could have a formulary process,
    but I think we also could have access to any product on the
    market. And so they're not oxymorons. And the way to do that is
    to decide what clinically reflects the clinical care of most
    patients who are going to receive that benefit and then if
    patients want above and beyond, then you could just make the
    co-pay, make it co-pay, so if they want that particular
    product, then they could acquire it just with co-pay. Let's
    leave it open to allow any drug to be accessed, but do that
    through co-pay.
        Mr. Ogden. I hear what you're saying and absolutely, when I
    was the Chief of Pharmacy, how drugs came on the formulary,
    clinical people in that facility where I worked needed that
    drug for a particular reason and we would make a decision on
    putting a drug on the formulary based on cost, based on dosing,
    like you've heard and many times we made a decision to keep
    that drug and make it available for a specific clinical reason,
    an individual may be not able to take pills twice a day. Maybe
    that person needs--we can make exceptions. Give the purchaser
    the option to buy up if they want.
        Mr. Allen. Mr. Conte, I have a smaller question and I just
    wanted to know and you may have covered it, but I missed it, if
    you could just talk about the impact on your facility of more
    veterans signing up for--to get the prescription drug category,
    veterans signing up for their prescription drug benefits. How
    big an influx have you had and how have you dealt with it?
        Mr. Conte. As Congressman Tierney knows, we were fortunate
    enough to enforce--John was working with us on this--and
    because of that our veteran population went from around 9,000
    to 16,000 a year, so we've had a tremendous increase in
    veterans coming. Service has been good, yet it generates a
    large prescription volume. I would say we're probably going to
    expend just on volume alone. It doesn't increase costs. We have
    $2.5, $3 million in the budget for prescriptions for those
    patients that come in. That's really the impact, the volume of
    people coming to the VA because we do provide something more
    than just prescriptions. I think John's alluded to that. If you
    come to the VA system, we're asking you to join that system to
    provide continuity of care, not just prescriptions. I as a--my
    pharmacy had the honor--a friend of my is a physician--would
    not want to be just a writing service and not have any
    responsibility, yet legally, he's responsible for the medical
    care of that individual by dispensing the prescription and/or
    writing that prescription. So when people come in to join our
    primary care clinic and then you become part of the VA system,
    so that alone also has impacted us because we need more staff
    to do that and I think you've talked about, someone on the
    committee talked about the funding mechanism where the VA
    system gives you a couple years later, so there's a lag in
    terms of that. We're constantly stressing the system trying to
    deal with those people who are on the waiting list, but it's
    had a major impact on the staff and I'm lucky enough that I
    have staff who is able to adapt and change.
        The other thing is centralized mail out pharmacy. I
    mentioned it briefly. We've never been able to recruit
    pharmacists for other issues, partly pay. We'll stay out of
    that area, but the issue becomes how will you take care of this
    large volume to bring in new patients and this mechanism has
    helped us to do that.
        Mr. Allen. Thank you very much.
        Mr. Tierney. With the indulgence of my colleagues here and
    panel members, we're going to break protocol a little bit. If
    there's anybody out in the audience area that has a question
    for members of this panel or a question for members of the
    committee, provided that you're willing to share with us your
    name, we're willing to open the microphone to give you that
    opportunity for a brief period of time. We still have some
    time. And if we could get an idea of how many people might be
    interested in that opportunity, we'll be able to judge how much
    time each person would have. Is there anybody that today has a
    question, a comment? That saves us a lot of time.
        I want to thank both of you, gentlemen, very much for your
    testimony. I'm sure that you'll be hearing from us and we'll
    try to work together. I thank Mr. Shays, again for his
    generosity, Mr. Allen for his work in the area. I thank all of
    you.
        Mr. Shays. I thank the chairman, again for your encouraging
    us to come up here. I would just take the liberty to thank
    Michael McEneamy, State Administrator and Mr. Anthony Lopez,
    the Court Officer and Marilyn Franklin, the Court Reporter. I
    thank all three for their help and I obviously thank our staff
    for their work on both sides of the aisle, and again, thank
    you, Mr. Chairman.
        Mr. Tierney. Thank you also and we'll look forward to
    working with you on this issue.
        [Whereupon, at 12:30 p.m., the hearing was concluded.]