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

                           PURCHASING PROGRAM



                               before the


                                 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

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                     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
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
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
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 

                CHRISTOPHER SHAYS, Connecticut, Chairman
ADAM H. PUTNAM, Florida              DENNIS J. KUCINICH, Ohio
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

                               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

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

                           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 
    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:]
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    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 
    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:]

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    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:]

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    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 
    [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.


    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 
    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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    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 
    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 
    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 
    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 
    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 
    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.
    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 
    Mr. Allen. So 40 percent of the purchases are brand name. 
We'll correct that later, are brand name, but 91 percent of the 
    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 
    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 
    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 
    Mr. Shays. I'm sorry, who sets a fair price on exclusive 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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.
    Mr. Tierney. I think we'll get started on this second 
    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, 
    Mr. Ogden. No, I'm going to paraphrase my statement.


    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 
    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 
    [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 
    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 
    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 
    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 
    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 
    So the formulary is important, absolutely important. It's 
driven by what's actually happening out there at the front 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Ogden. I'm a proponent of allowing States to form 
    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 
    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 
    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 
    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.]