[Senate Hearing 107-644]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-644
 
COMPARATIVE PRICING OF PRESCRIPTION DRUGS SOLD IN THE UNITED STATES AND 
                CANADA AND THE EFFECTS ON U.S. CUSTOMERS
=======================================================================

                                HEARING

                               before the

     SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 5, 2001

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation






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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                  Mark Buse, Republican Staff Director
               Jeanne Bumpus, Republican General Counsel
                                 ------                                

          SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE 
                              AND TOURISM

                BYRON L. DORGAN, North Dakota, Chairman
JOHN D. ROCKEFELLER IV, West         PETER G. FITZGERALD, Illinois
    Virginia                         CONRAD BURNS, Montana
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
BARBARA BOXER, California            GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 5, 2001................................     1
Statement of Senator Dorgan......................................     1
Statement of Senator McCain......................................     7

                               Witnesses

Giroux, Stephen L., Community Pharmacist, Middleport Family 
  Health Center, and Member of the National Community Pharmacists 
  Association, accompanied by John M. Rector, Senior Vice 
  President for Government Affairs and General Counsel to NCPA...    62
    Prepared statement...........................................    65
Hubbard, William K., Senior Associate Commissioner for Policy, 
  Planning and Legislation, Food and Drug Administration, 
  accompanied by David Horowitz and Matthew Eckel................     8
    Prepared statement...........................................    10
Jeffords, Hon. James M., U.S. Senator from Vermont...............     3
Marvin, John, Member of the Alliance for Retired Americans.......    32
    Report by the Alliance for Retired Americans.................    33
    Prepared statement...........................................    52
Powell, Marjorie E., Assistant General Counsel, Pharmaceutical 
  Research and Manufacturers of America..........................    55
    Prepared statement...........................................    56
Sager, Ph.D., Alan, Professor of Health Services and Co-Director, 
  Health Reform Program, Boston University School of Public 
  Health.........................................................    68
    Prepared statement...........................................    71
Stabenow, Hon. Debbie, U.S. Senator from Michigan................     5
Wennar, Elizabeth A., President and Chief Executive Officer, 
  United Health Alliance.........................................    26
    Prepared statement...........................................    28




COMPARATIVE PRICING OF PRESCRIPTION DRUGS SOLD IN THE UNITED STATES AND 
                CANADA AND THE EFFECTS ON U.S. CUSTOMERS

                              ----------                              


                      WEDNESDAY, SEPTEMBER 5, 2001

                                       U.S. Senate,
    Subcommittee on Consumer Affairs, Foreign Commerce and 
                                                   Tourism,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:15 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Byron Dorgan, 
presiding.
    Staff members assigned to this hearing: Moses Boyd, 
Democratic Chief Counsel; David Strickland, Democratic Counsel; 
Carlos Fierro, Republican Senior Counsel; and Ken Nahigian, 
Republican Counsel.

            OPENING STATEMENT OF HON. BYRON DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. The hearing will come to order. This is a 
hearing of the Subcommittee on Consumer Affairs, Foreign 
Commerce and Tourism of the Senate Commerce Committee. I 
apologize for my delay. I was in a leadership meeting that 
began earlier this morning, and I'm sorry I'm late.
    To begin, I would like to make a brief comment after which 
I will call on my colleague Senator Jeffords, who I think will 
also introduce someone he sponsors here today, followed by 
Senator Stabenow.
    Let me describe the purpose of this hearing. The Congress 
has grappled with the question of the cost of prescription 
drugs for some time. Many of us feel, and many Americans feel 
for that matter, that the cost of prescription drugs has risen 
so rapidly that it is very difficult for some who need 
prescription drugs to be able to have access to those drugs. We 
are talking about a range of issues, including providing a 
prescription drug benefit through the Medicare program and 
other issues.
    One of the issues that a number of us have worked on, 
Senator Jeffords, myself, Senator Stabenow and others, is to 
allow access to lower priced prescription drugs in other 
countries for the American consumers. We have enacted 
legislation in Congress that would allow pharmacists and 
licensed distributors to go to other countries and access a 
lower price prescription drug, the identical drug, the same 
pill put in the same bottle, produced in the same FDA-inspected 
plant, bring it back to this country and pass the savings along 
to the consumers.
    The legislation had an amendment attached to it that said 
it must, if implemented, demonstrate cost savings and that it 
be safe.
    Both the previous Administration and this Administration 
decided that they could not or would not implement this 
legislation. We will look at reasons for that during this 
hearing. I happen to disagree strongly with both the previous 
Administration and this Administration when they say there 
could not be demonstrated cost savings. In my judgment, that is 
false on its face. There are clearly cost savings demonstrated 
every day by those Americans who cross the border into Canada 
to access the identical prescription drug for a substantially 
lower price than they could acquire it for in this country.
    The issue of safety is in my judgment equally specious. I 
do not think that, as an American, we will discuss some of that 
this morning, but we are holding a hearing to evaluate this 
from several perspectives. We need to get this done, and having 
the previous Administration and this Administration refuse to 
implement this law is a setback but it is not terminal.
    Let me give you some examples of the price disparity. This 
is Zocor. The head football coach of the Atlanta Falcons talks 
about Zocor on television commercials nearly every day. He 
talks about how his life has improved because of Zocor. Zocor 
is a cholesterol lowering drug. It is purchased in this country 
for $3.82 per tablet, 20 milligrams, so it was $229.00 for this 
bottle. In Canada, for exactly the same pill purchased, made by 
the same company, in the same plastic bottle, the cost is $1.82 
per tablet. The difference: the American consumer pays more 
than twice as much, no other difference.
    This is Zoloft, commonly used for depression: the cost is 
$2.34 for the American consumer, $1.28 for the Canadian 
consumer.
    This medicine is Norvasc, used for high blood pressure. 
When purchased in North Dakota, $1.25 per tablet; when 
purchased in Canada, 90 cents per tablet.
    I went to Emerson, Canada one day and took with me a number 
of North Dakotans, one of whom was Sylvia Miller, a wonderful 
lady from Fargo, North Dakota. Sylvia Miller has diabetes, 
heart problems and emphysema. She takes seven different 
medications every day for her various ailments. Sylvia told me 
she receives $4,700 a year in Social Security benefits and she 
pays $4,900 a year for prescription drugs. On the way to Canada 
she said, ``Things don't add up, do they?'' But in Canada, she 
was able to cut her monthly prescription drug bill in half. The 
same FDA-approved medicine produced in the same plant.
    Now, the question is, why should Sylvia, at age 70, have to 
go to Canada to access these cheaper drugs. In my judgment, she 
should not be required to do that. So legislation we have 
drafted would allow pharmacists to purchase in Canada and bring 
those drugs back and to pass those savings along to the 
American consumers. We have been stymied, during both the 
previous Administration and this Administration, by HHS 
refusing to implement it, and we will talk a fair amount about 
that today in this hearing.
    That is the purpose of the hearing. Let me say again, 
prescription drug costs are increasing dramatically, 16, 18, 19 
percent a year, year after year after year. Price inflation and 
increased utilization are the causes.
    The fact that we have suffered setbacks from two 
Administrations who have refused to implement this legislation 
should not persuade people we are going to quit. Senator 
Jeffords and I offered this legislation in the Senate, and I 
would stay from my standpoint, and I assume from his, that we 
intend to continue this until we get it done.
    And frankly, my goal is not to force people to go to Canada 
to access cheaper drugs. My goal is that when we allow that to 
happen, the pharmaceutical industry will be forced to reprice 
their pharmaceutical products in this country so that the 
American people are not paying the highest prices for 
prescription drugs of any other consumers in the entire world. 
That is the goal.
    So, that is the purpose of this hearing. I appreciate those 
who have made an effort to be here today, and let me call first 
on Senator Jeffords. Senator Jeffords, let me say how much I 
appreciate your leadership on this legislation in the Senate. 
You have worked hard and long on this, and I know that this is 
the first chapter, that we are going to continue and we are 
going to complete it. Senator Jeffords.

             STATEMENT OF HON. JAMES M. JEFFORDS, 
                   U.S. SENATOR FROM VERMONT

    Senator Jeffords. Absolutely, and I can assure you that I 
have the same beliefs that you have and that we must proceed, 
and there is no reason why we cannot with this one. I want to 
thank you for holding the hearing and for letting me take a few 
moments to talk as you have about the unacceptable high cost of 
prescription medicine facing virtually all American consumers. 
Those high prices are even more unacceptable when they are 
compared to the relatively low prices paid by consumers of 
other industrialized nations.
    I want to also applaud the leadership you and our friend 
Senator Stabenow have continued to show on this important 
issue. The hearing today is especially important because it 
keeps all of us focused on finding ways to reduce the high cost 
of medicine and making it more available to our citizens.
    You will hear more about the pricing disparities from a 
number of witnesses today, but I want to take a minute to 
welcome one in particular. Beth Wennar, who is the President of 
the United Health Alliance in Bennington, Vermont, has been at 
the forefront of finding policy solutions to high prices 
experienced by Vermonters. Beth's experience and expertise has 
been invaluable to me in framing both the extent of the problem 
and the potential solutions for addressing it, and I urge the 
Committee to pay close attention to this.
    Last year we were able to enact the Medical Equity and Drug 
Safety, or MEDS Act. It was designed to allow safe FDA-approved 
medicines that are manufactured in plants approved by FDA and 
sold abroad to be purchased by American pharmacists and 
wholesalers to reimport them to the United States. We worked 
closely with the FDA.
    I want to emphasize that. We worked closely with the FDA in 
developing this law. We sought the agency's advice about 
provisions which were necessary to insure safety and quality of 
these medicines. We accepted that advice and included stringent 
controls in the MEDS Act, but now we are essentially being told 
that the goal posts have moved. We are now being told that what 
FDA then said would have worked to ensure safety now no longer 
would work, that the controls FDA advised us to include in the 
MEDS Act are now inadequate.
    Mr. Chairman, I can accept that the MEDS Act was not 
flawless. I can accept that there were some disagreements about 
whether and how it would work, but few doubted the notion that 
it should work. No one argued that the Americans should 
continue to pay prices higher than those of other consumers in 
other countries.
    President Clinton supported and signed the MEDS Act, and 
then Presidential Candidate George Bush supported it during the 
campaign. This is not a partisan issue. It is supported by 
Democrats, Republicans and Independents in the House and 
Senate, all of whom are looking for the right answers.
    So today I would argue that the FDA must stop telling us 
what will not work and must now tell us what will work. I hope 
that your witness from the FDA can begin to tell us what is 
necessary, what conditions are needed to make this program 
available to our citizens. We can then take that advice, write 
the necessary law and get to the matter at hand, to insure that 
Americans have better access to more fairly priced medicine.
    Mr. Chairman, I apologize, but I have to attend another 
Committee hearing that is examining the issue of stem cell 
research, but before I go, I want to again comment you and 
Senator Stabenow for your leadership on this issue, and thank 
you for holding this hearing. I know the Committee will listen 
closely to my friend and fellow Vermonter, Beth Wennar, and I 
will look forward to hearing the answers FDA is prepared to 
share with you about how to move forward with this program, and 
we must move forward. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Jeffords, again, let me say thanks 
for your leadership. You offered the amendment, I was proud to 
join you in the Senate, that actually launched the effort to 
get this in law, and we have been thwarted with respect to its 
administration at this point, but we will get it done. Your 
leadership is very important on this, and I deeply appreciate 
it.
    Let me also say that, Senator, you are welcome to go to 
your other hearing.
    Senator Jeffords. Thank you.
    Senator Dorgan. Senator Stabenow, you of course were a 
leader in the U.S. House on this issue, and we are delighted 
that you have now joined us in the Senate. As I indicated to 
Senator Jeffords, I look very much forward to working with you 
on this issue. Although the Administration has not seen fit to 
implement this legislation, we will get this done and, in my 
judgment, the sooner the better. I feel more confident in 
getting it done in the Senate with you here, and we very much 
appreciate your efforts.

              STATEMENT OF HON. DEBBIE STABENOW, 
                   U.S. SENATOR FROM MICHIGAN

    Senator Stabenow. Thank you, Mr. Chairman. I very much 
appreciate the opportunity to testify today on an issue that 
can dramatically lower health care costs for all of our 
citizens, and that is the issue of allowing Americans to 
purchase safe FDA-approved prescription drugs from other 
countries.
    I want to particularly thank you, Mr. Chairman, for your 
leadership, as well as Senator Jeffords. You have been the 
leaders in the Senate, I am very proud to have the opportunity 
to be in the Senate and to join you in that effort. As you 
indicated, I was involved in cosponsoring this legislation in 
the House of Representatives and this has been an issue that 
has been very very important to people that I represent in 
Michigan.
    It affects every American family, particularly our seniors, 
who as we know, use the majority of prescription drugs. 
Frankly, Mr. Chairman, too many seniors got up, sat down at the 
kitchen table, and have to decide do I eat today, do I pay the 
utility bill, or do I take my medicine. I know you join me in 
saying that this is simply not acceptable in the United States 
of America.
    I find it ironic, Mr. Chairman, that in an era of free 
trade, that we have effectively erected barriers on our borders 
that force our citizens in the United States to pay prices for 
prescription drugs that are often twice those paid by our 
neighbors even in Canada, as well as around the world.
    Particularly coming from Michigan, we look at the Canadian 
border, it is a 5-minute trip across the bridge or by tunnel, 
and there is such a dramatic difference in price, it is 
absolutely unacceptable.
    As you may remember, during my Senate campaign last year I 
organized bus trips to Canada, took a number of seniors who 
went to physicians and pharmacies in Canada to be able to 
demonstrate the differences in prices. It was a quick 5-minute 
trip, and we saw night and day price differences, and I would 
like to share those with the Subcommittee at this time.
    Mr. Chairman, you have spoken to some of the prescriptions 
as well that we have, but in our trips, we found the 
differences in Michigan, Zocor, a drug to reduce cholesterol, 
cost $109.73 for 50 5-milligram tablets. In Canada the exact 
same prescription cost just $46.17, a 138 percent difference in 
price.
    In Michigan, Prilosec, a drug to treat ulcers, cost $115.37 
for 20 20-milligram tablets. In Canada the same prescription 
cost just $55.10, a 109 percent difference in price.
    In Michigan, Procardia XL, a drug to treat heart problems, 
cost $133.36 for 100 30-milligram tablets. In Canada the same 
prescription cost just $74.25, an 80 percent difference in 
price.
    And there are certainly, Mr. Chairman, other examples that 
are on the chart. This literally is the difference between a 
senior being able to eat or be able to pay the utility bill, 
pay the telephone bill, pay the rent, pay the mortgage, and I 
found as I was at home this month again, over and over again, 
the No. 1 issue people want to speak about is the struggle that 
they are having being able to pay the high cost in the United 
States of prescription drugs.
    All of these drugs were manufactured in the United States 
and met all the FDA requirements for manufacturing, safety and 
purity.
    Furthermore, we should note that Americans paid for much of 
the research that led to the breakthroughs in many of these 
prescription drugs. I support the R&D tax plan, the efforts at 
federal labs through NIH to provide critical research and 
funding for that research, and yet we in America pay twice as 
much as anyone else around the world while supporting this 
research. It only makes sense that Americans should get the 
best possible prices on these life saving medicines as a return 
on their investment.
    Mr. Chairman, as you know, the very first bill I introduced 
into the Senate as the junior Senator from Michigan was a bill 
that would eliminate this health care tariff, and it builds on 
the legislation that you and Senator Jeffords introduced into 
the Senate, the amendment that was passed.
    We have looked at concerns raised by the previous and 
current Secretaries of Health and Human Services, and made some 
corrections to address what we felt were legitimate issues that 
could be put into this bill to make it crystal clear that there 
are no safety issues, and clearly there is a price savings.
    I welcome anyone who does not believe that there is a price 
savings to join me in Michigan, it is a beautiful time in the 
fall, the leaves are turning, we welcome it, and I would be 
happy in a 5-minute trip across the border to show you the 
difference.
    Mr. Chairman, I look forward to working with you, to 
working with Senator Jeffords, members of the Committee, and 
Senator Wellstone I know is very involved in legislation as 
well, to make sure that we can finally address this issue. The 
problem is clear and frankly, we have an immediate solution at 
hand. I know that, Mr. Chairman, you join me in a commitment to 
modernizing Medicare for prescription drugs, but I also know 
that in the Budget Committee that we are going to have a 
difficult struggle within the confines of this budget this year 
to really put forward the comprehensive prescription drug 
benefit that we all want.
    And most importantly, that we take the time to do that, 
time our seniors and families do not have. We need to have the 
same sense of urgency in our Congress that our seniors and our 
families have at home when the are trying to pay for life 
saving medicines that they need. We can do something now that 
does not involve a large amount of dollars. We can do something 
immediately to lower costs, and I know Mr. Chairman, that you 
have that same sense of urgency that I have that this needs to 
be done immediately, and I look forward to working with you. 
Thank you again for providing this critical hearing.
    Senator Dorgan. Senator Stabenow, thank you very much. In 
my comments, I failed to mention that Senator Snowe and former 
Senator Slade Gorton also were actively involved in introducing 
and sponsoring legislation in this area. We appreciate your 
testimony and thank you for being with us.
    We are joined today by Senator McCain. Senator McCain, do 
you have a statement?

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Mr. Chairman. I want to thank 
you for convening the hearing on the explosion of prescription 
drug prices. This is of critical importance, and I thank you 
for your decision efforts on this issue for several years now.
    I joined with my colleagues Senator Dorgan, and Senator 
Schumer in introducing a bill that would, among other things, 
streamline FDA approval of generic drugs by closing the 
loophole that allows brand name manufacturers to receive an 
automatic 30 month stay by simply filing a patent infringement 
suit against a generic manufacturer's patent challenge or 
application. The bill would also prevent brand name 
manufacturers from using financial advantage to keep generic 
products from entering the market.
    Mr. Chairman, I think this is a multifaceted issue. I think 
there are a number of parts and pieces of legislation that have 
been introduced, but the issue of delaying generic drugs from 
entering the marketplace is an important part of this 
discussion. It is unconscionable on the part of both the patent 
drug manufacturers as well as the generic manufacturers that 
there are cases where a patenting drug company will pay a 
generic drug company not to introduce that product into the 
market. There are records of that, and they have also used 
various other legal tactics in order to delay entry as well.
    I think that is a fairly easy thing for us to at least make 
some fixes on, but I still have been unable to explain to my 
constituents, and I know you have the exact same situation in 
the north, why they can drive to Mexico and buy a prescription 
drug at considerably less cost than in the United States of 
America. I would like to ask our witnesses that question 
because I still do not get it. And frankly, nor do a lot of the 
seniors who live in my state who by a simple trip down to 
Mexico, can buy the exact same drug for sometimes half or less 
than half the price of its brand name counterpart.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator McCain, I share your concern about 
the issue of generics, and it does come to the same point, it 
is all about the price and pricing practices, in most cases the 
American consumers are paying the highest prices anywhere in 
the world.
    And your point about borders, if this truly is a global 
economy, then why doesn't it work for ordinary folks to give 
them access to prescription drugs made in the same plant, 
inspected by the FDA? In short, why should Americans be 
prevented from crossing a border to access a prescription drug 
that was made in America, for a fraction of the cost that was 
charged in their retail outlet. Those are the right questions 
and that is why we are determined to do something about this 
issue. I appreciate your comments and support them.
    We have two panels today. The first consists of Mr. William 
Hubbard, Senior Associate Commissioner for Policy, Planning and 
Legislation of the FDA. Then we will have a second panel with 
five persons, and I will introduce them as we ask them to come 
forward.
    First let me welcome Mr. William Hubbard, Senior Associate 
Commissioner, Policy, Planning and Legislation of the Food and 
Drug Administration. Mr. Hubbard, thank you for joining us. Why 
don't you proceed.

STATEMENT OF WILLIAM K. HUBBARD, SENIOR ASSOCIATE COMMISSIONER 
      FOR POLICY, PLANNING AND LEGISLATION, FOOD AND DRUG 
ADMINISTRATION, ACCOMPANIED BY DAVID HOROWITZ AND MATTHEW ECKEL

    Mr. Hubbard. Thank you, Mr. Chairman. If I may, we are 
cluttering up the table here with drug samples, to complement 
those that you have.
    I would like to introduce my co-witnesses if I may, Mr. 
Chairman, David Horowitz, in charge of our compliance branch in 
the Center for Drugs, and Matt Eckel is in our counsel's 
office. I, of course, have written testimony but, I won't read 
that today. I will just make some comments.
    You are holding these hearings to examine drug pricing and 
while prices are not FDA's responsibility, we agree with you 
that prices in other countries are a little lower than in the 
United States. As Alan Sager and others have pointed out, 
prescription drugs are sold in Canada and Europe for up to one 
half of the U.S. price. This is because most developed 
countries have controls on drug prices and the U.S. does not. 
We are the only major developed country that does not set such 
price limitations.
    It is also apparent that the patient paying cash pays more 
than those who are third party payers and who negotiate a lower 
price. Thus, folks like the elderly, who often lack drug 
insurance coverage and must pay cash for their prescriptions, 
are often hit the hardest, and I think for the Senators from 
areas with large rural populations, there is even more concern 
because the rural people get hit even harder than that because 
they don't have the access to several competing pharmacies.
    So, clearly, your constituents' needs here are real and 
significant, and we do not at all at FDA disagree with them. We 
have great sympathy for that. The question that gets asked of 
us as a drug safety regulatory agency, is whether we can find a 
way for patients to access these cheaper drugs if, in fact, 
they are clearly there.
    The answer unfortunately from our perspective is that 
Congress can change the law to let these drugs in, but only at 
the risk of lowering safety assurances for the drugs. The 
current drug regulatory system in the United States is highly 
protective.
    We believe, Mr. Chairman, that Congress got it right in 
1938 and 1962 when it set up a system that said that drugs had 
to be approved for a demonstrated safety and efficacy before 
marketing and, therefore, we have the safest and most 
technologically advanced drug system, in both development and 
manufacturing, in the world.
    The current system is fairly closed, it requires high 
standards of drug manufacturing. It utilizes a network of 
highly skilled pharmacists and other professionals to control 
the movement of these drugs, and it requires that imported 
drugs meet those same high standards.
    This system means that drug counterfeiting is a rare event 
in the United States, despite the fact that, worldwide, 
counterfeiting is endemic. In some countries, there are 
estimates that perhaps half of the drugs on the market are 
counterfeited.
    I will just give a few examples. These are counterfeit 
drugs that we found in FDA, and it is very very rare we find 
these. This is a recent one, an injectable called Serostim. One 
of these is counterfeit and one of these is real. If they 
weren't marked as counterfeit and genuine, none of us in this 
room could tell the difference, no pharmacist could tell, no 
physician could tell. That is part of the problem.
    These particular drugs are hormones and they were brought 
in from overseas and introduced into the market here, and in 
the package are vials of a saline solution and a powder. You 
pull the saline solution into a syringe and then you inject it 
into the other ampule which contains the powder, and you shake 
it up to actually formulate the drug for the person. Well, the 
problem is the drug was counterfeited, and it may be 
pharmacologically effective, but the problem with this drug is 
that the saline solution was not sterile. It was contaminated 
with bacteria and endotoxins so using it would inject people 
with septicemia.
    So, this is the problem we worry about with counterfeiting. 
These are very very real counterfeiting issues, although they 
are, and I will repeat, they are rare in this country.
    Now these examples are drugs that people have bought on the 
Internet from other countries.
    This probably was bought by a weight lifter, it is a human 
growth hormone. This purports to be an Eli Lilly product. We 
have no idea whether that's really an Eli Lilly product or not 
but it says it is. Then in other cases, we just have bags of 
pills.
    Now, we can look at some of these and try to determine what 
these are, but it is virtually impossible for any pharmacist or 
physician or anyone else to know what's in these packages.
    This one apparently is a Roche product called Valium, or at 
least it's marked that way. But we don't know if it really is 
Valium or not, and of course Valium is a controlled substance 
and should not be sold in this country without a prescription.
    So, these products are coming in every day. We estimate 
that perhaps as many as two million of these small shipments 
are being purchased by American citizens every year.
    Senator Dorgan. Mr. Hubbard, sorry to interrupt you, but 
when you say these products, you're not saying these products 
here, every day there is counterfeiting. When you are referring 
to these products, you are talking about products coming in 
from other countries.
    Mr. Hubbard. Right.
    Senator Dorgan. You had been talking about counterfeit 
drugs, so I just don't want people to misunderstand what you 
just said.
    Mr. Hubbard. Right. We know that some of these are 
counterfeit. These that I have most recently displayed were 
ones we pulled out of the Dulles mail facility just yesterday. 
They come in every day, and we have no idea whether they're 
counterfeit. We don't know.
    And so, the FDA's job is to make sure that when you go to 
your doctor and get a prescription and take it down to the 
pharmacy and get the drug, that you're getting the real drug, a 
drug that will be safe, a drug that will treat your condition. 
Of course we believe in that, and I'm sure you believe in that 
too.
    The problem is, we have no way of insuring, when they're 
coming in from these other countries in this way, to know 
whether they are the real drug or know whether they are safe, 
know where they are coming from, or know where they have been, 
or whether the drug may have been held in some sort of poor 
condition or in high heat, or cold, or it expired and was 
repackaged, or whatever.
    So while we understand the Senators' concerns about drug 
prices, we think that opening the doors to these foreign drugs 
undermines the safety and protection that has served us so 
well, and that's been the FDA's concern because our job is 
safety, and the drug price issue is one that we feel ill suited 
to solve. Thank you.
    [The prepared statement of Mr. Hubbard follows:]

Prepared Statement of William K. Hubbard, Senior Associate Commissioner 
   for Policy, Planning and Legislation, Food and Drug Administration
Introduction
    Mr. Chairman and Members of the Committee, I am William K. Hubbard, 
Senior Associate Commissioner for Policy, Planning and Legislation, 
Food and Drug Administration (FDA or the Agency). I appreciate the 
opportunity to discuss our mutual concerns related to the importation 
of drugs into the United States. This topic encompasses a range of 
issues, including the importation by individuals of prescription drugs 
at land borders or through the mail; the introduction into the U.S. of 
controlled substances from foreign sources under the guise of personal 
importation; the potential introduction of counterfeit bulk drugs into 
the U.S. drug supply; and the purchase of drugs from foreign sources 
over the Internet. Let me begin by discussing one of our greatest 
challenges in this area.
Personal Importation of Drugs Through the Mail
    The amount of prescription drugs for personal use imported through 
the mail has increased in recent years. According to testimony by the 
U.S. Customs Service (Customs) before the Government Reform Committee 
in May of last year, seizures of parcels containing scheduled or 
controlled substances at international mail facilities increased by 450 
percent in FY 1999, primarily due to drug sales over the Internet. We 
estimate that approximately two million parcels containing FDA-
regulated products for personal use enter the U.S. each year through 
international mail facilities that Customs could set aside for FDA 
review for possible violations of the Federal Food, Drug, and Cosmetic 
(FD&C) Act. This estimate is based on an extrapolation of data obtained 
during a pilot project conducted at the international mail facility in 
Carson, California (see below).
    Under the FD&C Act, unapproved, misbranded, and adulterated drugs 
are prohibited from importation into the U.S., including foreign 
versions of U.S.-approved medications, as is reimportation of approved 
drugs made in the U.S. In general, all drugs imported by individuals 
fall into one of these prohibited categories.
    From a public health standpoint, importing prescription drugs for 
personal use is a potentially dangerous practice. FDA and the public do 
not have any assurance that unapproved products are effective or safe, 
or have been produced under U.S. good manufacturing practices.
    U.S.-made drugs that are reimported may not have been stored under 
proper conditions, or may not be the real product, because the U.S. 
does not regulate foreign distributors or pharmacies. Therefore, 
unapproved drugs and reimported approved medications may be 
contaminated, subpotent, superpotent, or counterfeit. In addition, some 
foreign websites offer to prescribe medicines without a physical 
examination, bypassing the traditional doctor-patient relationship. As 
a result, patients may receive inappropriate medications because of 
misdiagnoses, or fail to receive appropriate medications or other 
medical care, or take a product that could be harmful, or fatal, if 
taken in combination with other medicines they might be taking.
Personal Importation Policy
    Under FDA's personal importation policy, as described in guidance 
to the Agency's field personnel, FDA inspectors may exercise 
enforcement discretion to permit the importation of certain unapproved 
prescription medication for personal use.
    First adopted in 1954, the policy has been modified several times 
over the succeeding years. It was last modified in 1988, in response to 
concerns that certain potentially effective treatments for AIDS 
patients were not available in the U.S., but were available in other 
countries. The Agency expanded the guidance for humanitarian purposes 
to allow individuals suffering from serious medical conditions to 
acquire medical treatments legally available in foreign countries but 
not approved in the U.S.
    The current policy permits the exercise of enforcement discretion 
to allow entry of an unapproved prescription drug if:

   the product is for personal use (a 90-day supply or less, 
        and not for resale);

   the intended use is for a serious condition for which 
        effective treatment may not be available domestically (and, 
        therefore, the policy does not permit inspectors to allow 
        foreign versions of U.S.-approved drugs into the U.S.);

   there is no known commercialization or promotion to U.S. 
        residents by those involved in the distribution of the product;

   the product is considered not to represent an unreasonable 
        risk; and

   the individual seeking to import the product affirms in 
        writing that it is for the patient's own use and provides the 
        name and address of the U.S. licensed doctor responsible for 
        his or her treatment with the product or provides evidence that 
        the product is for the continuation of a treatment begun in a 
        foreign country.

    FDA has not officially permitted the importation of foreign 
versions of U.S.-approved medications, even if sold under the same 
name, because these products are unapproved, and the Agency has no 
assurance that these products are safe or effective, while safe and 
effective versions are already available in the U.S.
    FDA believes that the need for its personal importation policy is 
far less now than it was when the current version of the policy was 
developed in 1988. Now, due to faster review times and various 
regulatory mechanisms through which patients can obtain unapproved 
treatments for humanitarian purposes, the need to import therapies not 
available in the U.S. has diminished. According to a Tufts University 
study presented in September 2000, 80 percent of new molecular entities 
approved in the U.S. in 1996 through 1998 received that approval within 
a year of its first introduction on the world market, almost double the 
rate during the years 1991 through 1995.
Implementation of the Personal Importation Policy
    At mail facilities, Customs officials identify parcels that may be 
violative of the FD&C Act. FDA inspectors then determine if these 
products should or should not be permitted to enter the country. If 
detained, FDA must issue a notice to the addressee describing the 
potential Federal violation and provide the individual with an 
opportunity to respond. If the addressee does not respond or provides 
an inadequate response, FDA will give the parcel back to Customs to 
have it returned to the exporter. Due to the requirements for notice 
and the opportunity to respond, the process for detaining and further 
processing mail parcels consumes large amounts of FDA resources. In 
addition, much storage space would be needed to hold the large number 
of detained parcels pending replies from the addressees.
    FDA's personal importation policy, as written, is difficult to 
implement. This is due, at least in part, to the difficulty faced by 
FDA inspectors, or even health care practitioners, in identifying a 
medicine by its appearance, and labeling may falsely identify a 
product. From a practical standpoint, FDA inspectors cannot examine 
drug products contained in a mailed parcel and accurately determine the 
identity of such drugs or the degree of risk posed to the individual 
who will receive these drugs.
    FDA detains and refuses few mail imports for personal use. As a 
consequence, the tens of thousands of parcels that FDA does not review 
are eventually released by Customs and sent on to their addressees, 
even though the products contained in these parcels may appear to 
violate the FD&C Act and may pose a health risk to consumers. We do not 
believe this is an acceptable public health outcome and are working to 
develop a solution.
HHS Plan to Address Mail Imports for Personal Use
    Due to the inability of FDA to cope with the volume of medications 
imported for personal use through the mail, and because of the public 
health risks associated with these products (as discussed below), FDA 
has been working to develop a more effective personal importation 
policy. In addition, we recognize that Customs is dependent on guidance 
from FDA, and one of our goals is to provide clear and simple standards 
for assessing parcels containing drug products. We are discussing 
options for revisions to the Agency's personal importation policy with 
Secretary Thompson.
Carson Mail Facility Pilot
    Earlier this year, FDA and Customs conducted a survey of imported 
drug products entering the U.S. through the Carson City, California 
mail facility (the Carson pilot). The Carson pilot was proposed by 
Customs as a means to examine incoming mail shipments of pharmaceutical 
products over a specified time frame in order to identify both the 
volume and the types of drug products entering the U.S. We also hoped 
to better assess the efforts required to cover drug importations at a 
mail facility, and to gain a better understanding of the public health 
implications these importations may have for U.S. consumers.
    The Carson pilot ran for a five-week period, with FDA inspectors 
present for 40 hours per week. At the onset, Customs took a 
``baseline'' sample in the first week by setting aside all 
international packages that were suspect, or that they would have set 
aside for FDA review had FDA been able to process them. The number of 
packages set aside was approximately 3,300. Multiplying that number by 
five weeks provides an estimated total of 16,500 international packages 
(650 packages per day) that Customs could have set aside for FDA review 
during the Carson pilot, if the ability to process them was not a 
factor. After the first week, however, Customs actually set aside the 
number of packages they believed FDA would be able to examine. In 
general, during each week of the Carson pilot, more packages were set 
aside than FDA was able to handle.
    FDA was actually able to examine 1,908 packages during the five-
week pilot, an average of approximately 381 packages per week. Neither 
FDA nor Customs kept a count of the packages that were set aside but 
not examined. Unexamined packages were sent on to the addressees.
    Of the 1,908 packages examined by FDA, 721 parcels were detained 
and the addressees notified that the products appeared to be unapproved 
for use in the U.S., misbranded and/or a drug requiring a doctor's 
prescription. The parcels were shipped from a total of 19 countries, 
and overall, there was no obvious evidence of the products being 
imported for further commercial distribution. On average, the Agency 
was detaining at a rate of 144 packages per week, or about 38 percent 
of those examined.
    Clearly, the Carson pilot demonstrated that the rate of packages 
coming into the U.S. exceeds FDA's capacity to manage, thus, Customs is 
left with little choice but to forward the majority of packages to 
addressees. As we stated, we do not believe this is an acceptable 
public health outcome, and we are working to develop a solution.
Analysis of the Carson Pilot Drug Parcels
    In order to define better the nature of the risk to public health 
from the types of products coming into the U.S. through personal 
importation, FDA's Center for Drug Evaluation and Research (CDER) 
reviewed listings of the products detained during the Carson pilot. 
CDER's review demonstrates that there are serious public health risks 
associated with many of the 721 drug shipments (composed of 197 
different drugs) intercepted at Carson. In general, there are two types 
of risks that consumers of these drugs would face. The first type of 
risk is that associated with taking drugs of unknown origin or quality. 
Second are the very significant risks associated with taking many of 
these drugs without first obtaining a physician's prescription and 
without the continued oversight of the physician.
Risks Associated with Drugs of Unknown Origin or Quality
    In general, FDA has no information to establish where these drugs 
were actually manufactured and whether necessary current Good 
Manufacturing Practice requirements were followed. There is also no 
assurance that the drugs were packaged and stored under appropriate 
conditions to avoid degradation or contamination.
    Approximately eight percent of the shipments contained drugs that 
could not be identified because they contained no labeling; some of 
these contain only foreign language labeling. Most of these drug 
shipments were contained in plastic bags; one shipment contained drugs 
taped between magazine pages.
    Several drugs do not appear to correspond with any U.S.-approved 
drugs and the risks are therefore difficult to assess. One drug was 
evaluated for FDA approval but was denied approval. This drug is 
associated with cardiac abnormalities and its efficacy could not be 
successfully demonstrated. Another drug approved abroad but not in the 
U.S. is associated with medically serious gastro-intestinal 
complications. Several shipments contained three drugs that were once 
approved by FDA but have been withdrawn from the market based on 
serious safety concerns, including:

   fatal arrhythmia and dangerous drug interactions;

   loss of white blood cells (agranulocytosis) associated with 
        fatal infections; and

   hemorrhagic stroke.
Risks Associated with the Absence of Physician Oversight
    The vast majority of the shipments were identified as containing 
prescription drugs, which by definition, have serious toxicities and 
risks associated with them such that they are ``not safe for use except 
under the supervision of a practitioner licensed by law to administer 
such drug.'' (Title 21, United States Code, section 353(b)). Although 
some foreign Internet sites might offer an online questionnaire, we 
believe that very few, if any, require a prescription from a 
practitioner licensed in the U.S. before dispensing such drugs to U.S. 
residents. Moreover, after detention notices were issued to the 
intended recipients of the 721 drug shipments, fewer than four percent 
presented evidence of prescriptions to document their relationship with 
a physician in association with the drugs purchased from abroad. The 
lack of adequate English language labeling accompanying many of these 
shipments exacerbates the risks associated with the absence of 
physician oversight.
    During the Carson pilot, as in normal practice, Customs generally 
separated out controlled substances for processing by the Drug 
Enforcement Administration (DEA) before the remaining shipments were 
provided for FDA review. However, in FDA's review, six controlled 
substances were identified, including lorazepam, codeine sulfate, 
loperamide, chlordiazepoxide, chloral hydrate, and diphenoxylate. These 
drugs have the potential to cause addiction or be abused. Life-
threatening overdoses are possible. A physician's prescription and 
oversight are essential for managing these risks.
    There are numerous drugs identified on the Carson list that are 
intended to treat conditions that consumers need physicians to properly 
diagnose. As a result, consumers who bypass physician diagnosis and 
prescribing may be exposing themselves to risks and toxicities that 
cannot be justified by offsetting benefits to those patients.

   For example, almost ten percent of the shipments were for 
        antibiotics, despite the fact that consumers are generally not 
        able to diagnose whether their symptoms are caused by bacterial 
        infections. The overuse of antibiotics continues to be a 
        serious public health concern because it is linked to the 
        growth of antibiotic resistant-bacteria.

   Several drugs listed are potent steroids, which are 
        generally prescribed for conditions that are not self-
        diagnosable. In addition, potential adverse events associated 
        with these drugs, including diabetes, hypertension, and serious 
        infection require prompt attention and careful monitoring.

    There are many drugs on the list for which it is essential that the 
proper dose be delivered into the bloodstream at the proper rate. Some 
of these drugs have a narrow range in which they can safely achieve 
their therapeutic effect. At least seven such drugs were identified on 
the Carson list. Without FDA oversight, there is the risk that these 
drugs may not have been manufactured with the necessary quality 
controls to ensure a consistently safe and effective product.

   One seizure medication on the Carson list, for which there 
        were three shipments, could be very dangerous if not 
        manufactured to these rigorous standards. Any change in potency 
        could render the drug ineffective or highly toxic.

   Another seizure drug on the list for which physician 
        monitoring is also essential has a narrow therapeutic range and 
        FDA labeling provides a black-box warning for hepatoxicity, 
        teratogenicity, and pancreatitis.

    More than 30 drugs on the list have serious contraindications and/
or drug interactions for which physician oversight is essential. For 
instance, almost 20 percent of the shipments were for various estrogen 
products for which there are multiple serious contraindications that a 
physician needs to consider before making prescribing decisions and in 
monitoring the patient.
    It is impossible to make a scientifically definitive statement on 
the public health impact of the drug shipments encountered during the 
Carson pilot without extensive chemical testing and analysis of the 
incoming pharmaceuticals, which would be prohibitively expensive. Based 
on the observations noted above, however, FDA believes that these drugs 
pose substantial risks to the public health, and we further believe 
that significant changes to the policies governing personal 
importations through the mail are warranted.
Border Surveys
    Over the last year, FDA has initiated three other surveys to gather 
data on drug products imported by individuals into the U.S. Although 
these border surveys involve land traffic rather than mail importation, 
the results of these surveys show some similarities to the findings 
from the Carson mail pilot, as well as some significant differences.
Southwest Border Survey (August 2000)
    A survey of prescription drugs being brought by pedestrians into 
the U.S. at eight ports of entry along the 2,000 mile border with 
Mexico was conducted by FDA's Southwest Import District (SWID) with the 
assistance of other agencies including Customs, the DEA, the U.S. 
Department of Agriculture, and others. The survey looked at activity 
during four hours on a Saturday (August 12, 2000) at eight border ports 
in California, Arizona, and Texas. The purpose of the survey was to 
interview individuals walking across the border into the U.S. from 
Mexico who had purchased prescription drugs in Mexico to determine 1) 
what specific types of products are being imported, and 2) who is 
importing these products.
    The data collected from over 600 interviews indicated that the most 
common importer of prescription drugs during the survey was an older 
male Caucasian with a prescription from the U.S., bringing back 
primarily antibiotics or pain relievers for his own use. Prescriptions 
were held by 63 percent of the persons interviewed (59 percent U.S. 
prescriptions and 41 percent Mexican). The most common drugs and their 
indications that were purchased in Mexico during the survey were as 
follows: Amoxicillin (antibiotic), Glucophage (diabetes), Premarin 
(estrogen), Dolo Neurobion (vitamin supplement), Vioxx (inflamation), 
Retin-A (acne), Tafil (anxiety), Celebrex (arthritis), Penicillin 
(antibiotic), Viagra (impotence), Carisoprodal (analgesic).
Canadian Border Survey
    On January 6, 2001, in cooperation with Customs, FDA conducted a 
survey to obtain a snapshot of prescription drug products being brought 
into the U.S. from Canada via passenger vehicles. During the eight-hour 
survey at three ports of entry in New York, Michigan and Washington, a 
total of 10,374 passenger vehicles and 58 buses crossed into the U.S. 
Of these, 33 passenger vehicles (35 individuals) were referred by 
Customs to be interviewed. These individuals brought in a total of 47 
containers of drug products from Canada.
    The types of products included pain medicines--primarily ``222'' (a 
combination of acetaminophen, caffeine, and codeine) or similar 
products. The indicated reason for import was that the products were 
available over-the-counter (OTC) in Canada and cost less than in the 
U.S. The next largest group of products was herbal products, with the 
reason for importation being that the products were not available in 
the U.S. Other products included Tobradex (antibiotic/steroid opthalmic 
for individuals having laser eye surgery); Claritin and Allegra 
(allergies) purchased OTC in Canada; Sibelium capsules (calcium channel 
blocker); and a variety of OTC products sold in Canada and not 
available in the U.S.
Southwest Border Survey (April 2001)
    On April 11, 2001, FDA, Customs, and other agencies conducted a 
survey of prescription drugs being brought into the U.S. at seven ports 
of entry along the U.S./Mexican border. This survey coincided with both 
Easter vacations from many colleges and the end of the ``snowbird'' 
season, when tourists from Northern states visiting along the Southern 
border return home.
    During the four hour ``blitz'' a total of 586 persons brought in a 
total of 1,120 drugs. Approximately 56 percent had a prescription for 
the medicines (61 percent were U.S. prescriptions, 39 percent were 
Mexican). The most common drugs purchased in Mexico were: Amoxicillin 
(antibiotic), Premarin (estrogen), Claritine (allergy), Terramicinia 
(antibiotic), Ampicillin (antibiotic), Ibuprofen (analgesic), 
Penicillin (antibiotic), Vioxx (inflammation), Tafil (anxiety), Dolo 
Neuorobian (vitamin supplement), Glucophage (diabetes), Celebrex 
(arthritis), Naproxen (analgesic), Retin-A (acne), Ventolin (pulmonary 
disease), and Valium (controlled substance/nervous system depressant).
Controlled Substances
    Although we do not know, nor is it possible to clearly determine, 
the amount of controlled substances brought into the U.S. purportedly 
for personal use, it is likely that such medicines are frequently 
imported for resale and pose a public health risk. The Agency has been 
working with both Customs and DEA to streamline and clarify Federal 
import policies specifically related to the importation of controlled 
substances.
Internet Drug Sales
    Based on surveys conducted in early 2000 by Office of Criminal 
Investigations (OCI) and subsequently by the General Accounting Office 
(GAO), it appears that there are roughly 300 to 400 Internet sites 
selling prescription drugs, with approximately half located 
domestically and half located outside the U.S. FDA has long taken the 
position that consumers are exposed to a number of risks when they 
purchase drugs from Internet sites or other mail order outlets that 
dispense foreign drugs. These outlets may dispense expired, subpotent, 
contaminated or counterfeit product, the wrong product, a 
contraindicated product, an incorrect dose, or medication unaccompanied 
by adequate directions for use. FDA cannot provide consumers with any 
assurance that these products were manufactured under current good 
manufacturing practice standards. Taking an unsafe or inappropriate 
medication puts consumers at risk for dangerous drug interactions and 
other serious health consequences.
    Internet sites that provide prescription drugs by having consumers 
fill out a questionnaire rather than seeing a doctor pose serious 
health risks. A questionnaire generally does not provide sufficient 
information for a healthcare professional to determine if that drug is 
appropriate or safe to use, if another treatment is more appropriate, 
or if the consumer has an underlying medical condition where using that 
drug may be harmful.
    FDA has undertaken widespread public relations efforts to warn 
consumers about the dangers of buying drugs online, and we have 
provided extensive information on these dangers on FDA's own Internet 
site. FDA's Buying Medical Products Online web page is one of the most 
frequently requested pages on FDA's website. It consistently ranks 
among the top twenty requested pages, averaging almost 13,000 hits per 
month.
    Currently, FDA has 90 sites under active review for possible 
regulatory or civil action. Warning letters have been sent to 48 
domestic online sellers. Additionally, FDA has sent 121 ``cyber 
letters'' to operators of Internet sites offering to sell online 
prescription drugs or unapproved drugs. These sites may be engaged in 
illegal activity such as offering to sell prescription drugs to U.S. 
citizens without valid (or in some cases without any) prescriptions. 
Cyber letters are sent over the Internet to the suspect websites to 
warn the operators that they may be engaged in illegal activities, and 
inform them of the laws that govern prescription drug sales in the U.S. 
Cyber letters have a deterrent effect and FDA has seen positive results 
from using them. FDA has received positive responses from 20 percent of 
the cyber letter recipients and we are continuing to monitor these 
sites.
    FDA also sends copies of its cyber letters to the home governments 
of targeted websites, when the locations can be identified. Follow-up 
depends on the ability and willingness of the foreign regulatory bodies 
to investigate and take actions against website operators who are 
illegally shipping drugs to other countries.
    In cooperation with the Department of Justice (DOJ), five 
preliminary injunctions have been imposed on the sale of illegal 
products, including one product marketed as a weight-loss aid 
containing a potent thyroid hormone which could cause heart attacks or 
strokes, and an unapproved cancer therapy. FDA and DOJ also are 
pursuing an injunction against the sale of another unapproved cancer 
therapy over the Internet. Additionally, 15 product seizures, 11 
product recalls, and the voluntary destruction of 18 violative products 
have been achieved, generally pertaining to unapproved new drug 
products including gamma hydroxybutyric acid, gamma butyrolactone, 
Triax, 1,4 butanediol, and laetrile. Thirty-six foreign shippers have 
been placed on Detention Without Physical Examination and added to 
Import Alert 66-57 for targeting sales of unapproved new drug products 
to the U.S.
    During FY 2001, FDA's OCI initiated approximately 40 Internet-
related investigations and will continue to conduct investigations 
involving suspected criminal activity related to Internet drug sales as 
well as other Internet-facilitated criminal violations of the FD&C Act. 
Of the 133 currently open Internet-related investigations, 64 are 
Internet pharmacy cases, where the focus is on the possible dispensing 
of prescription drugs without a prescription.
    In recent years, OCI has initiated 285 Internet investigations and 
each of these investigations have involved a variable number of actual 
websites--typically ranging from one to 25 or more. OCI has effected 88 
Internet-related arrests, 70 of these in drug-related investigations. 
Of the 70 drug-related arrests, 11 have involved Internet pharmacy 
cases. These arrests have resulted, thus far, in 48 Internet-related 
convictions, 42 of these in drug-related investigations. Of the 42 
drug-related convictions, five have involved cases involving the sale 
of prescription drugs without a valid prescription.
    In addition, OCI has an ongoing initiative at the Dulles 
International Airport Mail Facility that had its genesis in their first 
Internet case, which began in 1994. The case, which involved a site 
selling steroids over the Internet, resulted in a successful 
prosecution and shutdown of the website. The partnership resulting from 
this case has continued, and in the past 18 months, OCI has been 
involved with local law enforcement in the Washington metropolitan area 
in 98 drug seizures. The seizures represent dozens of types of drugs 
coming in from 13 different countries. Of the 98 seizures, 87 of the 
drug seizures were ordered over the Internet and mailed to U.S. 
citizens; six were mailed to the U.S. by family or friends living 
abroad; four were ordered via a 1-800 telephone number from Canada and 
mailed to the U.S.; and one was transported via an airline passenger in 
two suitcases from Romania. The efforts of OCI, Customs, and local law 
enforcement have yielded the execution of eight search and seizure 
warrants and led to the arrest and prosecution of nine people.
Conclusion
    Mr. Chairman, FDA remains concerned about any possibility that 
unsafe drugs may find their way into the American drug supply. We will 
remain vigilant as we refine and improve the programs and procedures 
that we use to ensure the availability of safe medications for 
consumers.
    We appreciate the Committee's interest in assuring that the 
American public has access to safe and affordable medicines. We look 
forward to continuing to work with you. Thank you again for the 
opportunity to participate in today's hearing. I will be happy to 
answer any questions.

    Senator Dorgan. Mr. Hubbard, thank you very much. I have 
read your entire testimony. Let me ask you some questions about 
this, because I am curious. You have spent most of your time 
referring to counterfeit drugs and the issue of safety. We have 
about $14 billion worth of drugs imported into this country by 
manufacturers; is that correct?
    Mr. Hubbard. I don't know the number, but generally a 
majority of the raw material for drugs come in from foreign 
sources and the finished pharmaceuticals are made in this 
country.
    Senator Dorgan. Now let me ask you a question about the 
Canadian system, and I want to focus on that just for a moment, 
if I might. Do we have a system in this country that is 
substantially safer than Canada's?
    Mr. Hubbard. I'm not well prepared to describe the safety 
or conditions in any other country. We certainly believe that, 
we certainly believe that we have the safest.
    Senator Dorgan. Let me just focus on Canada for a moment, 
because if you are saying the reimportation of prescription 
drugs from Canada by the pharmacist or licensed distributor 
compromises safety, then you must be prepared to tell me 
whether you think our system is safer than Canada's. Let me 
tell you why I am asking the question.
    Some, perhaps sometime in the next hour up in Binford, 
North Dakota, a truck is going to come across the border from 
Canada, it is going to have a load of fresh meat on it, cows or 
hogs have been slaughtered and they come over in the form of 
fresh meat. We are not going to inspect that fresh meat. You 
know why? Because our country decided that the Canadian 
inspection system is fine for us, and so we will not inspect 
that meat. And that is an FDA and USDA decision.
    I am asking a question about Canada. If a pill is produced, 
a tablet is produced in an FDA approved plant either in the 
U.S. or Canada, it goes to a distributor or pharmacist in 
Canada and ends up in a one-room pharmacy in Emerson, Canada, 
and then a pharmacist from Binford, North Dakota wants to go to 
that one-room pharmacy in Emerson and pay one-tenth the cost 
for Tamoxifen and bring it back across the border and pass the 
savings along to the senior citizens or the women who have 
breast cancer in Binford, and they are told no, they are not 
allowed to do that because there is a safety issue.
    The question is, what is the safety issue? I want to 
specifically talk about Canada. What is the safety issue?
    Mr. Hubbard. Let me say in the case of the meat situation 
that you mentioned, by law the Canadian meat processor in 
Canada has to be approved by the U.S. Department of Agriculture 
and inspected by the Department of Agriculture, and must be 
what is known as equivalent. It is under a very rigorous U.S. 
set of standards in meat processing. It is likely to be 
inspected again at the border by a USDA inspector.
    Senator McCain. That is not likely.
    Mr. Hubbard. In the case of drugs, that is not true, that 
is not required for drugs sold in Canada. It may be in fact 
that the same manufacturing plant assigned to a Canadian 
pharmacy and to a U.S. pharmacy can manufacture the medicine, 
so you are correct on that point. The problem is when the drug 
leaves the manufacturing facility and arrives, and goes out 
into the Canadian market, it is outside FDA's jurisdiction and 
therefore, when the pharmacist procures that drug, we would 
have no way of knowing if, in fact, that was the real drug.
    Senator Dorgan. Mr. Hubbard, I understand that, but the 
same is true with the cow, or the steer that's slaughtered in 
Canada. That is outside the U.S. inspection system. We have 
simply determined that the Canadian inspection system is 
sufficient for us to allow that meat to come in uninspected.
    Now the question is this: If an FDA inspector finds--and 
this is all our legislation deals with, FDA-approved drugs 
manufactured in an FDA-inspected plant, if an FDA-inspected 
plant produces a bottle of medicine and sends it to a pharmacy 
in Winnipeg, Canada, you are saying that you cannot determine 
whether the Canadian system of providing safety in the chain of 
supply is sufficient to allow us to have confidence in it? We 
do it in a dozen other areas, but you cannot do it with respect 
to medicine?
    Mr. Hubbard. We are not authorized to do that. In your 
example, USDA is authorized to go to Canada and inspect and set 
standards for the Canadian meat packing and, in fact, the 
Canadians do not send meat until they meet those standards. In 
the case of drugs, that is not the case at all.
    Senator Dorgan. But you are answering a question I am not 
asking. I am not asking you whether you are authorized, I am 
asking whether you have the capability to determine whether the 
chain of supply in Canada is sufficient so that we have 
confidence in it just as we do in this country. Why would you 
not be able to do that, and then allow only pharmacists and 
distributors to be able to reimport only those drugs that are 
produced in an FDA approved plant and only those drugs that are 
FDA approved? How on earth can that be rocket science?
    That does not seem to me to be difficult, and yet, the FDA 
and HHS keep saying there is this huge safety problem. I 
understand there could be a safety problem from some areas, but 
I am trying to take the most logical instance here of Canada, 
where we have a lot of reciprocal agreements on what both sides 
are doing. I am assuming that the chain of custody in Canada is 
equivalent to ours with respect to----
    Mr. Hubbard. Well, you can make that assumption and I can 
make that assumption as well.
    Senator Dorgan. Do you know it is not?
    Mr. Hubbard. I do not know whether it is or not. We don't 
have authority, we have not looked at the Canadian system, 
that's not our job.
    Senator Dorgan. So you are telling me that you, you say 
there are safety concerns but you have not looked at the 
treatment of prescription drugs in Canada?
    Mr. Hubbard. Mr. Chairman, there are safety concerns about 
any drug that goes outside the approval process, and is subject 
to the intermingling of counterfeit drugs, to abuse of the drug 
or to some sort of diversion. Diversion is a very real problem 
for us in the world. Drugs get moved around and go places that, 
where they just lose control, and all kinds of malevolent 
things can happen to them in that process, and that's our 
concern. Sure, you or I might go to Canada today on a trip and 
get sick, go to a doctor and get a drug and feel confident that 
that drug from that Canadian pharmacy is good, but the FDA 
can't assure that.
    And once you have said Canada is the entree to this big 
U.S. market where the real money is, as it were, then the 
Canadian system becomes vulnerable to the sorts of 
international charlatans that deal in counterfeit drugs. So 
even if the Canadian system is every bit as good as ours, and I 
don't know whether it is or not, you are certainly saying that 
the Canadian system then is open to vulnerabilities by people 
who will try to enter the U.S. market because, again, that's 
where the money is.
    Senator Dorgan. Mr. Hubbard, I think from the first moment 
I have understood that the position of both the last 
Administration and this Administration is that there are safety 
concerns and you have made that judgment without understanding 
what the circumstances are in other countries, especially 
Canada. I mean, you are making it without knowledge of what is 
happening in Canada, and that concerns me.
    Mr. Hubbard. I think we're saying that there are 200 
countries that import products into this country and we are 
neither authorized nor empowered nor resourced, nor interested 
in examining the systems in those countries because that's not 
what we do, Mr. Chairman.
    Senator Dorgan. We do it for other products. I just 
mentioned meat, fresh meat, we do it in fresh meat. Right now 
there is a truck stopping at the border coming through, and you 
know what they will do? They will look at a strip that was cut 
to lay on the back. They don't inspect the meat. They look at a 
strip that is cut. Why? Because we have already been to Canada, 
and we have said your plants meet our standards. We are willing 
to accept that. Your trucks come through, and we are not going 
to stop you.
    Mr. Hubbard. That's right, Mr. Chairman.
    Senator Dorgan. Now why can that not work with respect to 
prescription drugs that are made in a U.S. manufacturing plant, 
sent to a pharmacy in Winnipeg, Canada, and then brought back 
across the border by a pharmacist in Binford, North Dakota, why 
can that not work?
    Mr. Hubbard. I suppose that it could be designed and 
situated in a way where the Canadian manufacturing plant would 
have to meet U.S. requirements.
    Senator Dorgan. What if it is a U.S. manufacturing plant 
that makes the pill and sells it to Winnipeg through a 
distributor, and a pharmacist brings it--don't talk about a 
foreign pill, let's just talk about an American pill made in an 
American plant, FDA-approved plant that is then through a 
distributor sent to a pharmacy in Canada, and you are saying 
that you cannot assure safety if a registered U.S. pharmacist 
goes to a Winnipeg pharmacy and brings it back and passes the 
savings along to the consumer.
    Mr. Hubbard. That's correct, Mr. Chairman. Our concern is 
that once that U.S. manufactured product that we would give an 
FDA seal of approval to leaves the United States, it goes 
wherever it goes, whether it be 10 miles across the border in 
Canada, or 10,000 miles to Asia, we have lost control of it. We 
do not know if it comes back what it is, where it came from, 
whether it's safe. That's our problem, Mr. Chairman.
    Senator Dorgan. Well, you have more problems than that. I 
want to come back in a second round. Senator McCain.
    Senator McCain. Mr. Hubbard, I am sure you are aware of the 
North American Free Trade Agreement.
    Mr. Hubbard. Yes, Mr. Chairman.
    Senator McCain. That free flow of goods and services 
between three countries has been a spectacular success. I am 
sure you are aware of that. Why should prescription drugs be an 
exception to the North American Free Trade Agreement?
    Mr. Hubbard. Well, the free trade agreements with both the 
GATT arrangement and the North American are to give the 
individual countries the right to set specific safety standards 
for any product for that country. So for instance, a 
contaminated food in Honduras could be sold legally in Honduras 
but could not come into the United States.
    Senator McCain. Mr. Hubbard, I am talking about the North 
American Free Trade Agreement.
    Mr. Hubbard. The point is that those agreements allow 
countries to set safety standards that may be different from--
--
    Senator McCain. But not so as to impede the flow of goods 
and services between----
    Mr. Hubbard. Right, they can't be a so-called trade 
barrier.
    Senator McCain. Exactly. And clearly what you are talking 
about is a trade barrier, because you are saying that Canadian 
manufacturers cannot manufacture a product or drug that is the 
same whether it goes to the United States or Canada, or 
certainly not one that would allow it to flow freely into the 
United States. Is there a manufacturing facility of a U.S. drug 
company located in Canada?
    Mr. Hubbard. There probably is, I don't know.
    Senator McCain. What do you do about--you don't even know 
that?
    Mr. Hubbard. Oh, drug manufacturers register with the FDA, 
and if there is one there that is registered with the FDA, we 
inspect it.
    Senator McCain. You don't know.
    Mr. Hubbard. I don't know. There is a registration with 
thousands of manufacturers, so I don't know.
    Senator McCain. You don't know if any of them are from 
Canada. You come to this hearing well informed, Mr. Hubbard.
    Let me just say, or ask this question. If a U.S. drug 
company has a manufacturing facility, obviously it has to be 
approved by the FDA in Canada, could that product then meet all 
of your requirements if it were sent to the pharmacy in Canada 
and then sent to the United States?
    Mr. Hubbard. Well, there is a specific law passed by 
Congress in 1988 that prohibits the reimportation of a drug 
made in this country that goes to another country and then 
attempts to return. It can only be returned to this country if 
it was by an original manufacturer who basically never lost 
control of it. So the answer to your question is no, it cannot 
come back in.
    Senator Dorgan. Might I just point out that that specific 
law is the one that we repealed effectively and asked you to 
implement, and you refused to implement it based on what you 
say are safety and cost issues. So I think that I might point 
out, Senator McCain, that you are asking the right question 
here. If a U.S. pharmaceutical company is manufacturing in 
Canada, the FDA is up there inspecting the plant because they 
are going to ship those drugs down to Grand Forks, Minnesota, 
to sell them, the question is, can a Grand Forks pharmacist go 
up to Canada and access those drugs for half the price and 
bring them down and pass the savings along to the consumer. The 
answer from Mr. Hubbard is no, they cannot do that because we 
do not think we can assure safety. Is that it?
    Mr. Hubbard. Well, there are certain requirements that 
relate to safety of drugs and in order for it to be technically 
feasible for us to do that, there are certain requirements.
    For instance, a Canadian drug will have a foreign label on 
it and we would require the American label so the patient can 
be warned of whatever. Also, in other countries, manufacturers 
may change the product slightly, the milligrams may be slightly 
more or less, the color may be different, there may be so-
called inactive ingredients. There may be lots of changes that 
occur in the drug that make it not the drug that the U.S. 
patient receives.
    Senator McCain. I don't know why they would want to do that 
if they are manufacturing a product that is being sent to the 
United States of America. It seems to me it would cost them 
more to do all those things.
    Mr. Hubbard. In fact, that's a business decision and, in 
fact, they do do that.
    Senator McCain. Why is it, do you think, that the cost is 
so much lower in Canada and Mexico for the same drugs?
    Mr. Hubbard. In Canada they use a system called a reference 
price in which they take the lowest price the drug is sold 
across seven countries, that's mostly European countries and 
the United States. In the United States they use what is called 
the federal supply schedule, which is the price paid by the 
Defense Department and the VA and other public hospitals. They 
then say to the manufacturer, you can charge no more than the 
average of these seven countries' prices, so it is a price 
controlled system, and they are maintaining the price that can 
be charged. They may say, you can make so much profit.
    In France they set a price of their own. Different 
countries set their prices differently, but they say this is 
the price you can sell that drug at.
    And of course, generic drugs in this country are 
competitive on the world market. I think the biggest problem is 
the so-called brand name drugs that are still patented. When 
generic competition occurs, as you yourself said, Mr. McCain, 
the prices do in fact drop dramatically.
    Senator McCain. I am a deregulator, I do not believe in 
price control, but it seems to me that if it costs one-tenth 
for the same drug in Canada, do you think then, that we should 
look at price controls?
    Mr. Hubbard. I don't think that's--I mean, our job is 
safety. I think price controls are an issue for others in the 
Administration to consider.
    Senator McCain. Do you not have obligations to the consumer 
here?
    Mr. Hubbard. Well, we do. I think we care a lot about this 
in the sense that we try to get generics on the market as soon 
as we can, we work with drug companies to get newly developed 
drugs on the market as rapidly as possible. I think we do try 
to do things to provide access to patients, but this issue of 
how much they charge for a drug is outside our area of 
expertise.
    Senator McCain. Are you aware of the abuses that are being 
exercised by some drug companies with the generic drug 
manufacturers?
    Mr. Hubbard. Yes, Mr. McCain.
    Senator McCain. Do you think that ought to be changed?
    Mr. Hubbard. We have expressed willingness to work with 
committees in Congress to discuss those issues. I don't believe 
that we have been specifically asked about the particular 
legislation at this point, but we are certainly willing to 
discuss it.
    Senator McCain. We would like to have your opinion on the 
legislation, specifically where patent drug companies pay 
generic drug companies to keep a particular generic drug from 
being manufactured. Are you aware of that?
    Mr. Hubbard. Yes.
    Senator McCain. I would like to know your opinion on this 
legislation. It would be helpful.
    I want to say Mr. Hubbard, that disparity in pricing, 
particularly where our two neighbors are concerned, for the 
exact same drug today, forces seniors all over America to make 
a choice between their health and their income, because of the 
high cost of prescription drugs. So I hope you understand why 
we are so concerned about this particular situation and why it 
is hard for us to respond to our constituents as to why it is 
that the citizens of our two neighboring countries pay less for 
prescription drugs, as opposed to our own constituents. I hope 
you understand the problem we're trying to address.
    Mr. Hubbard. Absolutely.
    Senator McCain. I thank you for your forthright testimony.
    Senator Dorgan. Senator McCain, thank you. Let me just 
observe that I think there are price controls on restricted 
drugs in this country by the pharmaceutical companies; they 
control the price, and they do that with this law that prevents 
the reimportation. And when Dan Reeves, the coach of the 
Atlanta Falcons, goes on television every night and says Zocor 
is a lifesaving drug, he will describe the miracles of modern 
medicine of lowering cholesterol and so forth. The problem is 
that the Canadian that buys Zocor pays $1.82 per tablet and the 
American pays $3.82 per tablet. The question the American 
consumer asks, as Senator McCain asked, why can they not go to 
a pharmacy in Winnipeg and pay the $1.82?
    You say, Mr. Hubbard, it is because of your concern about 
safety. Let me again focus just on Canada, and I think what we 
would like to do is reintroduce this legislation and pass it 
dealing just with Canada, just taking a first step.
    Let me read to you Dr. David Kessler's letter. He says, 
``The Senate bill''--and he's talking about our bill that we 
passed that is now law--``allows only the importation of FDA-
approved drugs manufactured in approved FDA facilities and for 
which the chain of custody has been maintained, addresses my 
fundamental concerns. I believe the importation of these 
products can be done without causing a greater health risk to 
American consumers.'' I would be interested in your response to 
Dr. Kessler's letter.
    Mr. Hubbard. I think as a potential patient, were I to be 
ill and purchase a drug from Canada, I think I would have a 
relatively high degree of confidence in Canadian drugs, 
speaking personally, because they are close by, our approval 
systems work together, we know them, people go there and 
purchase drugs, so you know----
    Senator Dorgan. What do you mean, our approval systems work 
together?
    Mr. Hubbard. Well, we often talk to our counterparts in 
Canada when we approve drugs, they will approve them at the 
same time, and there is----
    Senator Dorgan. You have more knowledge than you were 
allowing earlier.
    Mr. Hubbard. Well, the scientists talk. We talk with the 
Europeans quite a bit, and there is a lot of collaboration on 
the underlying data about whether a drug should be approved and 
its safety, so sure, the Canadian system is one we have some 
knowledge of, and I would have some degree of confidence to say 
as opposed to a Third World country.
    But the problem is the system is set up, the way the law is 
and the FDA implements it is designed to deal very specifically 
with the production of drugs and their movement, and drugs in 
Canada are not part of that system, and therefore, we're saying 
that we cannot provide the assurance of safety. And I will 
repeat that I am concerned that any country that became the 
entree to the United States could then become a trans-shipment 
point for problem drugs.
    Senator Dorgan. Mr. Hubbard, in a global economy, every 
country has entree to every other country, that's a given.
    Let me ask you how you respond to Dr. Kessler's evaluation, 
if we just deal with Canada. Just dealing with Canada, is he 
correct that really that dissolves the issue? Because we are 
going to give you a chance to do that, we are going to pass 
this legislation again, and we are just going to take the first 
step, just Canada, and then see if the Administration or the 
previous, or anybody else involved in this thing can honestly 
say there are safety issues.
    Mr. Hubbard. I just don't think that we would be able to 
provide the same assurances of a drug imported from Canada or 
any other country as we could for American drugs. On some 
level, or some scale of----
    Senator Dorgan. So you think Dr. Kessler is wrong?
    Mr. Hubbard. I would never second-guess any former 
commissioner, I'm sure they are all right about anything they 
say.
    Senator Dorgan. First of all, I am really disappointed that 
you seem to suggest that the only way you can assure the safety 
of the drug supply of FDA-approved drugs produced in FDA-
approved facilities, the only way you can assure that safety is 
if reimportation is only by a manufacturer. What makes the 
manufacturer such a much better importer than a licensed 
pharmacist?
    Mr. Hubbard. I think it is possibly the closeness issue, 
but as I said earlier, when this product appears in a North 
Dakota pharmacy, how do we know, it came from Canada, how do we 
know it's not a counterfeit? In fact, this one appeared in a 
pharmacy in Chicago and it was a counterfeit, and no one knew.
    Senator Dorgan. And how did you find that?
    Mr. Hubbard. I believe there were some questions raised by 
physicians and our criminal investigators inspected, and found 
some very difficult to find variations in a label, and then 
after some follow-up testing and all, discovered that a Long 
Island, New York drug wholesaler was purchasing counterfeit 
drugs from the Middle East and bringing it in. It wasn't really 
a counterfeit drug, and working out of a storeroom in the back, 
just using water out of a tap that wasn't sterile and, 
therefore, introducing a very dangerous product.
    Senator Dorgan. You are saying it happens rarely here?
    Mr. Hubbard. It happens very rarely here.
    Senator Dorgan. And it happens more often in Canada, is 
that your point?
    Mr. Hubbard. We know that in the world it happens----
    Senator Dorgan. I am talking about Canada.
    Mr. Hubbard. I can't specifically speak to counterfeiting 
in Canada, I will have to do some research and get back to you 
on that.
    Senator Dorgan. Well, we are going to give you a chance to 
implement a piece of legislation dealing specifically with 
Canada, and my hope is that we will have the FDA and HHS 
support on behalf of consumers, and support consumers both by 
assuring safety and assuring reduction in costs by being able 
to access the same drug, the same company, and that we import 
it to this country.
    Now let me tell you, I respect your opinion, I do not mean 
to bring you here to cast disrespect on your opinion. We 
disagree about this, but I am convinced, as are many many 
experts in this country, that we have the will and we can do 
with prescription drugs, just as we have with many other 
sensitive products, provide a safety net with respect to the 
chain of supply, and allow our American consumers to be able to 
access the identical drug produced in an FDA-approved plant 
from a Canadian pharmacist and to be able to allow the 
pharmacists in this country on behalf of consumers to do the 
same thing.
    Let me make just one additional point through a question 
about costs. I have not spent a lot of time on costs, there 
will be some testimony about that, but it is also the case that 
the HHS and FDA, I think primarily HHS, saying that there 
cannot be a demonstrated cost savings, that on its face will 
fly in the face of reality. Anyone who has purchased drugs in 
Canada understands that there is a very dramatic cost savings 
for the identical drug produced in an FDA-approved plant.
    So, can you just describe for me if the Administration 
still believes that you cannot demonstrate a cost saving, and 
if so, why?
    Mr. Hubbard. When Secretary Thompson was asked to relook at 
this issue, he asked his Office of Planning and Evaluation, 
which has cognizance over this, to look at the cost issue. And 
while it's very clear, as you pointed out, that the purchase 
price in a foreign country and the purchase price here is 
different, the Secretary's staff also included concerns about 
the various middlemen that would want profit from this, and 
concluded that it was basically inconclusive that cost savings 
would be as great, the costs that you would have in this 
country. For instance, the wholesaler who received the drug 
perhaps from the Canadian pharmacy, the pharmacist himself in 
the United States, would add to the price they would pay, 
assuming they paid what they would view as a wholesale price, 
which might be a retail price in Canada, and that the ultimate 
saving to the consumer at the end of the line might not be 
anywhere near what the price would be if the citizen actually 
traveled to Canada and actually bought it in Canada.
    And so, that was I think their concern that there would be 
costs in the system to get the drug here and move it around 
and, therefore, these middlemen would be taking their 10 or 20 
profit would eat up much of the savings. I think that was their 
concern, so therefore, they concluded that they couldn't really 
determine whether these cost savings that would seem to be 
apparent are really there.
    Senator Dorgan. And who are they again?
    Mr. Hubbard. Well, it was the Office of Planning and 
Evaluation in the Secretary's office who did the study 
essentially. FDA did not do that particular examination. We 
examined the MEDS Act from more of the process of the testing 
and the documentation and those other requirements from the 
act.
    Senator Dorgan. Well, I will not dwell on this. I think it 
is quite apparent there are very substantial savings and for 
the very reason that you indicated in your written testimony 
today, that there are limits on what can be charged by the 
pharmacies in the other countries, and the result is, our 
consumers pay the highest prices in the world for prescription 
drugs. The ability to access the identical drug from an FDA-
approved plant for a fraction of the price, it seems to me, 
clearly demonstrates savings, but we will leave that for 
another day for experts in that particular area.
    Let me again say that I think we will give you the 
opportunity to deal just with the issue of Canada, and the 
issue of safety and chain of supply and cost. It will be my 
intention, along with my colleagues, to pass legislation in 
this Congress, and I am confident that we will do it, that 
focuses just on Canada for the moment. We will just take the 
first step, and then we are going to have another hearing if 
there is not an implementation, and I will not be nearly as 
gentle in my nature.
    I should tell you, I am very frustrated by this, enormously 
frustrated, largely because I think that both the previous 
Administration and this Administration have gone out of their 
way to find ways not to implement this. The Clinton 
Administration and the Bush Administration have both tried to 
find ways to not do something.
    Now, I have a lot of folks from my home town, and I come 
from a real small town, and I can identify folks who sit around 
and find ways not to do things, you know, they are crabby all 
day, and every community has people like that. The people that 
make things happen and make changes in this country are the 
people that are looking for ways to get things done and make 
progress.
    I do not want to compromise the safety of our drug supply, 
that is not my intention. Nor do I want our consumers to be 
handcuffed to the highest prices for prescription drugs of 
anyone in the world and then be told that they are prevented 
from going across the border to purchase a prescription drug 
made in an FDA-approved plant, an FDA-approved drug made in an 
FDA-approved plant, and pay 50 percent or 10 percent of the 
price because of some arcane piece of legislation was passed 
that represents, in my judgment, a sweetheart deal for the 
pharmaceutical industry. I am hopeful that we can change this.
    Mr. Hubbard, you have answered our questions, and I again 
respect your opinion. I am not disrespectful to someone who 
disagrees with me, but I expect we will go at this again at 
some point because we are going to pass some legislation in 
this Congress and have additional hearings. I hope that our 
paths will cross again, and I hope perhaps you will be able to 
say to me that you all have taken a good look at the Canadian 
system, you have some confidence in that system, you have 
engaged with the Canadians with respect to the chain of supply 
issues, and tell us that there are no safety concerns with 
respect to the way we have reconstructed this law.
    So let me give you my thanks for coming here today with 
other members of your staff.
    Mr. Hubbard. Thank you, Mr. Chairman. We certainly 
understand that your interests are in protecting the patients 
as well, and obviously we will continue to do this the best 
that we can.
    Senator Dorgan. Thank you very much, Mr. Hubbard.
    We will call the next panel forward. Ms. Elizabeth Wennar, 
President and CEO of United Health Alliance in Bennington, 
Vermont; Mr. John Marvin, member of the Alliance for Retired 
Americans; Ms. Marjorie Powell, Assistant General Counsel, 
Pharmaceutical Research and Manufacturers of America; Mr. 
Stephen Giroux, Community Pharmacist, Middleport Family Health 
Center, and Member of the National Community Pharmacists 
Association in Middleport, New York; and Dr. Alan Sager, 
Professor of Health Services and Co-Director of Health Reform 
Program, Boston University School of Public Health.
    We appreciate all of your being with us today. We have 
received the testimony that you have prepared, and we ask that 
you present a summary of your testimony. We will begin with 
Elizabeth Wennar, the President and CEO of United Health 
Alliance. Ms. Wennar, as you know, Senator Jeffords was here 
and spoke of you earlier. Welcome.

STATEMENT OF ELIZABETH A. WENNAR, PRESIDENT AND CHIEF EXECUTIVE 
                OFFICER, UNITED HEALTH ALLIANCE

    Ms. Wennar. Thank you very much for having me here. As you 
mentioned, I am the President and CEO of United Health 
Alliance. By way of a little background, I have a nursing 
background, I have a masters in public health from Yale 
University, I have a doctorate from the Medical University of 
South Carolina in health administration and policy, and I 
completed my doctoral dissertation on the importation of 
prescription drugs, particularly looking at Canada.
    Having said that, quite a few things that I have in my 
testimony have already been covered so I will try and not be 
repetitive, and I understand I only have about 5 minutes, so 
stop me when you think you've heard enough.
    Senator Dorgan. We have a light system, actually. When the 
red light comes on, a trap door opens.
    Ms. Wennar. Well then, let that trap door fall into Canada, 
please.
    Mr. Chairman and Members of the Committee, as you are 
aware, today's healthcare market presents many challenges for 
consumers, purchasers and our political leaders. None is more 
controversial than that of technology in the form of a pill. 
More often than ever, our policymakers and physician providers 
are being queried as to why it is that Americans, particularly 
senior citizens, must pay many times more than their Canadian 
counterparts for the same drug.
    By way of background, what I'm going to do is to share with 
you a little bit of what we have done from a grass roots level 
in Bennington, Vermont.
    United Health Alliance is a nonprofit physician health 
system organization located in the southwestern corner of 
Vermont. Our partners include a rural hospital and nursing 
home, a home health agency, and just over 100 community-based 
physicians. We serve residents in Vermont, Massachusetts, and 
New York. Our mission is to promote a physician-driven 
organization whose principal services are to provide advocacy 
and leadership in the areas of care management, contracting, 
performance improvement and educational programs to maximize 
value for our membership.
    Although we have committed to 10 guiding principles, none 
is more important to us than assisting the communities we serve 
at becoming the healthiest in the nation. Approximately one 
year ago we found although this was an admirable objective, 
this objective was going to be difficult to achieve given the 
circumstances that existed for some of our elderly. Very 
simply, they did not have access to affordable prescription 
drugs and, therefore, they were not able to comply with the 
treatment plans prescribed by their physicians.
    Although we had individuals that we knew were seeking their 
medications affordably via bus trips to Canada, this was not an 
option for the majority of the elderly in the communities we 
serve by virtue of either their medical condition or their 
financial ability of doing so.
    One of our physicians came to us and requested our 
assistance at investigating how we could help a patient of his 
with breast cancer access her medications from Canada without 
having to get on the bus. Today that patient takes her 
medication because she can afford it. It cost her 90 percent 
less.
    We compared the costs for 145 seniors for 6 months, and I 
have provided copies of that graph in my testimony. We compared 
the cost for the 145. As you can see, these individuals would 
have paid $81,000 in the U.S. and they paid approximately 
$22,000 for their medications in Canada. Our understanding is 
that there were no substitutes made for these medications, all 
medications accessed were for the treatment of chronic diseases 
such as diabetes, heart disease and cancer.
    A price comparison of more commonly prescribed medications 
is also included in my testimony and you can see here, they are 
significant. Although there are minor variations across Canada, 
the savings are still significant, and have been reported 
anywhere from 30 to 95 percent.
    Although the majority of the individuals using what we call 
MedicineAssist are the elderly on fixed incomes with no 
prescription drug coverage, we are beginning to see individuals 
that have depleted their pharmacy benefits also attempting to 
access their medications from Canada.
    We have had multiple conversations with employers located 
in our communities and they have told us that they now must 
consider cutting benefits because they no longer can afford to 
supply the coverage that they have historically. The 
implications are frightening to all of us.
    I'm now going to move to quality. I have heard quite a bit 
discussed concerning quality. Clearly as a provider network, 
our major concern is the ability of our patients to comply with 
a given treatment plan. When a patient cannot afford their 
medications, it's costly for all of us. Are we concerned about 
quality? Absolutely, Mr. Chairman, we are concerned about 
quality, and there is a quality issue and it exists on this 
side of the border, we would propose.
    When a patient cannot take their medications, they most 
definitely will consume services elsewhere in our system such 
as the emergency room or by being admitted to the hospital. 
That is simply not rational. This is not about people that 
won't comply with a treatment plan, this is about individuals 
that can't afford to purchase prescription drugs in the country 
they live in.
    Also, let's keep in mind that we are talking about Canada, 
not a Third World country. Having said this, these individuals 
are looking to take the risks associated with crossing the 
border. Many of them have told us that they are willing to take 
these risks.
    I'm going to skip over the portion on why we think that 
drugs are less costly in Canada, but I will tell you clearly, 
there is no simple answer with regard to these issues. Barring 
any type of regulation of the pharmaceutical industry on this 
side of the border, personal reimportation from Canada under 
controlled circumstances can provide an interim solution for 
those who need access to a prescription drug.
    I do believe with the cooperation of the industry, the FDA, 
the Canadian regulators and the U.S. physicians, that under a 
controlled demonstration project we could achieve a policy that 
would prove beneficial for all the stakeholders until we can 
produce a better solution.
    In conclusion, I was asked to share something with you by a 
physician who recently called me. He basically had a patient 
that came to him and asked him to help him get his medications 
in Canada for his high cholesterol. The physician reached into 
the trash can and retrieved a prescription with a note attached 
to it that had been delivered to him earlier that day by his 
staff. The note read: Dear Doctor, Thank you for the 
prescription but I am returning it to you because I went to the 
pharmacy to get it filled today and when they gave it to me, I 
could not afford it.
    According to the physician, this was a diabetic amputee 
that he had given samples to and had responded extremely well. 
He did what came next, he wrote a prescription. He had no idea 
that this one medication would cost this gentleman on a fixed 
income over $140 a month. He [the physician] noted that that 
man was on the medication and had done extremely well on it. As 
this patient's caregiver, he felt that instead of solving a 
problem for his patient, he had indirectly created one. Not a 
good feeling to know your patient will not be able to comply 
with a treatment plan you prescribe for them because he or she 
cannot afford it, and that you unknowingly contributed to that 
situation. His answer to the patient sitting in front of him 
was you bet.
    The medication for that amputee would have cost $65 in 
Canada versus $140 here.
    Thank you very much for this opportunity.
    [The prepared statement of Ms. Wennar follows:]

              Prepared Statement of Elizabeth A. Wennar, 
     President and Chief Executive Officer, United Health Alliance
Mr. Chairman, and Members of the Committee:

    Thank you for inviting me to discuss the issues associated with the 
pricing of pharmaceuticals for U.S. consumers.
    As you are aware today's healthcare market presents many challenges 
for consumers, purchasers and our political leaders. None is more 
controversial than that of technology in the form of a ``pill.'' 
Pharmaceutical spending has almost doubled in less than a decade. More 
often than ever, our policymakers and physician providers are being 
queried as to why it is that Americans, particularly the elderly, must 
pay many times more than their Canadian counterparts for the same drug.
Background on United Health Alliance and MedicineAssist
    United Health Alliance is a nonprofit physician health system 
organization located in Southwestern Vermont. Our partners include a 
rural hospital, nursing home, home health agency and just over one 
hundred (100) community physicians. We serve residents of Vermont, New 
York and Massachusetts. Our mission is to promote a physician-driven 
organization whose principle services are to provide advocacy and 
leadership in the areas of care management, contracting, performance 
improvement and educational programs to maximize value for our 
membership and customers. Although we have committed to ten (10) 
guiding principles, none is more important to us than assisting the 
communities we serve at becoming the healthiest in the nation. 
Approximately one year ago we found that although admirable, this 
objective was going to be very difficult to achieve given the 
circumstances that existed for some of our elderly. Very simply, they 
did not have access to affordable prescription drugs, therefore they 
were not able to comply with the treatment plans prescribed by their 
physicians. Although we had individuals that were seeking affordable 
medications via bus trips to Canada, we knew that this was not an 
option for the majority of the elderly in the communities we serve by 
virtue of their medical condition and/or their limited resources. One 
of our physicians came to us and requested our assistance at 
investigating how we could help a patient of his with breast cancer 
access her medications from Canada without having to get on a bus. 
Today that patient takes her medication because she can afford them. It 
cost her ninety (90) percent less in Canada. We compared the costs for 
145 seniors for the first six months to see if what we had heard about 
the differences in pricing was in fact true. While these individuals 
would have had to pay just over $81,000 in the U.S., they paid 
approximately $22,000 for their medications in Canada. Our 
understanding is that there were no substitutions for the medications 
they were currently on. All medications accessed were for the treatment 
of chronic diseases such diabetes, heart disease and cancer. A price 
comparison of some of the more commonly prescribed medications for the 
treatment of these diseases has been provided along with this 
testimony. Although there is minor variation with some pricing in 
Canada, the savings are still significant and have been reported 
anywhere from thirty (30%) to (95%) percent. Although the majority of 
the individuals using MedicineAssist are the elderly on fixed incomes, 
with no prescription coverage, we are beginning to see individuals that 
have depleted their pharmacy benefits also attempting to access their 
medications from Canada. As we have conversations with employers 
located in the communities we serve about benefits and coverage for 
their employees we find many are concerned about how to continue the 
level of coverage they currently provide, particularly with the growth 
in their expenditures for prescription drugs. The implications are 
frightening for all of us.
Quality
    Clearly as a provider network, our major concern is the ability of 
patients to comply with a given treatment plan. When a patient cannot 
afford their medications it is costly for all of us. Are we concerned 
about quality? Absolutely. And there is a quality issue and exist on 
this side of the border. When a patient cannot take their medications, 
they most definitely will consume services elsewhere in our system, 
such as the emergency room or by being admitted to the hospital. That 
simply is not rational. This is not about people that won't comply with 
a treatment plan, this is about individuals that can't afford to 
purchase prescription drugs in the country they live in. Also, let's 
keep in mind that we are talking about Canada not some third world 
country. Having said this, these individuals are willing to take the 
risk to access their medications across the border. Many of them have 
told us that there is certainly no more risk in doing this than they 
are at by not taking their medications as prescribed or not at all.
Reasons for Price Differential in Canada and the U.S.
    To put it in the simplest of terms: the Canadian government is the 
purchaser, therefore they have implemented controls over the costs. 
Next, they do not allow direct-to consumer advertising. My 
understanding is that this type of marketing is only allowed in the 
United States and New Zealand. Essentially our major mode of control is 
through the approval process by the FDA that essentially controls entry 
into the market, not pricing. In the U.S. with its non-universal 
coverage structure, cost containment is undertaken by a myriad of 
public and private decision-makers, each with their own agenda and 
objectives. The price differential is of course going to appear even 
greater when you compare a group that has no coverage and pays out of 
pocket. They have no purchasing power, because they have no coverage. 
This is particularly true for about one-third (30 million) of the 
Medicare population.
    I recently visited with health care providers in France and in 
Canada and they seemed quite perplexed by how we could rationalize the 
cost/benefit of allowing the prescription drugs to be advertised in the 
manner that they were on television. Their point was well taken on two 
fronts: (1) someone has to pay for the costs associated with this 
advertising and (2) when I proposed that it was intended to educate 
consumers so that they could be more informed about what was available 
for their treatment: they asked where's the data to support that this 
was anything more than ``marketing'' the drugs the industry wants to 
sell or promote. They used the example of a drug for chronic 
indigestion allowing you to continue to eat foods that are clearly not 
good for you.
Reimportation/Importation from Canada
    Clearly, there is no simple answer with regard to the issues we are 
discussing. Barring any type of regulation of the pharmaceutical 
industry on this side of the border, personal reimportation from Canada 
under controlled circumstances can provide an interim solution for 
those in need of access to affordable prescription drugs. I do believe 
that with the cooperation of the industry, the FDA, the Canadian 
regulators and U.S. physicians that under a controlled demonstration 
project we could achieve a policy that would prove beneficial for all 
the stakeholders until we can produce a better solution.
Conclusion
    Before departing to attend this hearing, I received a call from a 
physician that requested that I share a recent situation that he was 
presented with. He had a patient that asked if he [the physician] would 
help him get his medications from Canada so that he could afford to 
take them? The physician said he listened as the patient began to 
explain the differences in pricing for the medication recently 
prescribed for his high cholesterol. The physician reached into his 
trash can and retrieved a prescription with a note attached to it. The 
note had been delivered to him earlier in the day by one of his staff. 
The note read: Dear Doctor, Thank you for the prescription, but I am 
returning it to you because I went to the pharmacy to get this filled 
and when they gave it to me, I couldn't afford to pay for it. According 
to the physician this was a diabetic amputee that he had given samples 
to and had responded extremely well, so he did what came next, wrote a 
prescription. He had no idea that this one medication would cost this 
gentleman on a fixed income over $140 for a one-month supply. He noted 
that the man was on other medications as well. As this patient's 
caregiver, he felt that instead of solving a problem for his patient he 
had indirectly created one. Not a good feeling to know your patient 
will not be able to comply with the treatment plan that you prescribed 
because he or she can't afford it and that you unknowingly contributed 
to the situation.
    His answer to the patient that was now sitting in front of him 
requesting help with purchasing his medications . . . you bet.
    By the way the medication for the diabetic amputee would have cost 
approximately $65 in Canada.
    This concludes my prepared remarks. Thank you again for this 
opportunity and I would be happy to try to address your questions.

                            UHAMedicineAssist
                       Six-month Summary Analysis
Time Frame: July-December 2000
Number of patients participating:                       145
Number of physicians participating:                     19
Number of drug names ordered:                           106
 


                                                        
                                                        


Total cost of prescriptions in U.S.                                  $81,006.17
Total cost of prescriptions in Canada                                $22,361.53
Total savings:                                                       $58,963.84
 
Percent savings:                                                     72.8%
Overall average savings:                                             68.4%
Range of savings by drug:                                            28%-97%
 
 
Source: United Health Alliance 2000 (MedicineAssist)
Note: U.S. prices are based on AWP plus 30%. The actual cost of U.S. prescriptions will vary based on geographic
  area and by individual pharmacies.



                                               Sample Drug Pricing
 
                                                                    Number of
                               Drug                                    Tabs      Canada       U.S.      Savings
 
 
Tamoxifen 10 mg---------------------------------------------------------60---------$7.05-----$142.44------95%---
Lipitor 10 mg                                                           90       $106.33     $230.58      54%
Plaxil 10 mg                                                            30        $33.01      $94.57      60%
Prozac 10 mg                                                           100       $115.93     $361.28      68%
Coumadin 5 mg                                                          100        $25.52      $90.07      72%
Glucophage 500mg                                                       100        $15.70      $86.26      82%
Prilosec 10 mg                                                          30        $33.88     $144.62      77%
Fosamax 10 mg                                                           30        $36.40      $85.99      58%
----------------------------------------------------------------------------------------------------------------
 
Note: U.S. prices are based on AWP plus 30%. The actual cost of U.S. prescriptions will vary based on geographic
  area and by individual pharmacies. All dollar figures are reflected in U.S. Currency.


    Senator Dorgan. Ms. Wennar, thank you very much. We 
appreciate your testimony.
    Mr. John Marvin, a member of the Alliance for Retired 
Americans.

 STATEMENT OF JOHN MARVIN, MEMBER OF THE ALLIANCE FOR RETIRED 
                           AMERICANS

    Mr. Marvin. Thank you, Senator Dorgan. I appreciate the 
opportunity to testify today. I am representing the Alliance 
for Retired Americans, where I serve as a Regional Board Member 
for the northeastern part of the nation. The Alliance, which 
was established on January 1 of this year, now has 2.6 million 
members across the nation. It is made up of retirees from 
affiliates of the AFL-CIO, community-based organizations, 
individual seniors who joined the Alliance to fight for social 
and economic justice and civil rights for all Americans. I am 
also representing the Maine Council of Senior Citizens.
    Today I submitted testimony which I hope you will read. I 
really want to testify from the gut, if you will. You are 
talking--you've heard of the angry young man. Today you're 
going to hear from an angry old man. The current policy seems 
to result in a kind of people export into Canada act instead of 
a workable reimportation act into this country.
    This is the fourth year that I have spent organizing bus 
trips to Canada for prescription drugs run on an average of 
one-third to one-half cheaper than here. Last year 25 people 
caught a bus, saved $10,000 from the costs over what they would 
have paid in this country had they bought those same drugs 
here.
    We always have on most trips at least one person and 
usually more, women who are suffering from breast cancer, which 
means they must take Tamoxifen for virtually the rest of their 
lives. At my local drug store in Augusta, Maine, a month's 
supply of Tamoxifen costs $114.99. Last August, that same 
month's supply in St. Stephen's, New Brunswick, just across the 
border, cost $14.50. That's why I am an angry old man about the 
situation as it relates to prescription drugs.
    The trips do two things in addition to being of immediate 
help to those fortunate enough to be able to ride the bus. They 
highlight the fact that persons without drug coverage in this 
country literally pay the highest prices in the world, as you 
were pointing out, for drugs made mostly in Puerto Rico and 
heavily subsidized by the U.S. taxpayer.
    In that respect, I want to point out that the major reason 
why the drug prices in the United States are so high is the 
pharmaceutical industry has a lock on the supply of needed 
drugs, backed up by law and power. It controls the development 
process for new drugs both here and throughout the world. The 
laws of this nation then protect the market power of the 
industry by providing patent protection for almost two decades.
    To make sure this patent protection stays secure, we add in 
public financing of the highest risks of development process. 
The industry spends hundreds of millions of dollars to 
influence government at all levels. The result is the exploited 
pricing policies that we are discussing here today.
    A publication of the Alliance, The Profit in Pills: A 
Primer on Prescription Drug Prices, documents why prescription 
drug prices have increased so dramatically, and the various 
ways that the pharmaceutical industry protects its interests at 
the expense of the American public. Most affected are older 
persons and those with disabilities who take more medications 
than other segments of the population and are most likely to 
pay the full retail prices.
    I respectfully request that this report be included in the 
hearing record and I would also ask that you, Senator Dorgan, 
put it into the Congressional Record so that all of your can 
colleagues may also have an opportunity to read it.
    Senator Dorgan. Without objection, the publication will be 
part of the hearing record.
    [The information referred to follows:]

the profit in pills: a primer on prescription drug prices, a report by 
                   the alliance for retired americans
[Reprinted from The Profit in Pills: A Primer on Prescription Drug 
Prices with permission of the Alliance for Retired Americans.]

Dear Reader:

    Our purpose in producing this report is to make the public aware of 
how price gouging by the pharmaceutical industry is allowing industry 
profits to soar at the expense of every American citizen and every 
American company with health benefits. Even the health plans covering 
younger and working citizens are being squeezed because of 
hyperinflation of prescription drug prices.
    Unfortunately, those ages 65 and older and persons with 
disabilities suffer the most because they take more medications than 
other segments of the population. More than 40 percent of all 
prescriptions written are for retired Americans, who make up 13 percent 
of the U.S. population. While more than 13 million older Americans and 
people with disabilities have no prescription drug coverage at all, the 
coverage other Medicare beneficiaries have is often very expensive 
(some policies cost more than $3,000 a year), inadequate and 
unreliable. Almost half of all Medicare beneficiaries lack coverage for 
at least part of each year. In addition, health maintenance 
organizations (HMOs) have dropped more than two million Medicare 
beneficiaries, many of whom have been unable to find another HMO, and 
employer-provided health and prescription drug insurance is declining.
    The Alliance for Retired Americans believes the time has come for 
the federal government to act decisively to resolve the crisis. There 
is overwhelming support for the government to provide prescription drug 
coverage for the elderly and persons with disabilities and to confront 
drug prices. That support must be translated into political action.
    The more than 2.5 million members of the Alliance for Retired 
Americans, organized in 2001 and growing rapidly, are making the fight 
for prescription drug coverage for all Medicare beneficiaries their No. 
1 legislative priority in Congress. Including pharmaceuticals as a 
basic, defined Medicare benefit would equip the Centers for Medicare 
and Medicaid Services, the agency of the U.S. Department of Health and 
Human Services that administers Medicare, to use its national 
purchasing power to bring outrageously high prescription drug prices 
under control and set national standards for reasonable prices. 
Medicare drug coverage also would provide current workers with the 
peace of mind of knowing they will be able to get the medicines they 
need when they retire. Even such corporate giants as General Motors are 
calling for the addition of a universal prescription drug component to 
Medicare. Other approaches to use government authority to control and 
moderate drug prices also must be explored and adopted.
    The Alliance believes that drug benefits, like other Medicare 
benefits, should be available to all Medicare beneficiaries with no 
income test; all medically necessary and approved treatments should be 
covered; enrollment must be voluntary so people who now have plans can 
keep them; provision should be made to encourage current employer 
retiree plans to maintain at least their current levels of benefits; 
premiums, deductibles and co-payments must be affordable; there must be 
reasonable limits on beneficiary out-of-pocket expenses; and lower-
income beneficiaries should have all costs covered. Most importantly, 
to make the benefit affordable to taxpayers and beneficiaries, drug 
price cost controls are essential.
    In the longer term, the Alliance believes the enactment of a 
universal health system that includes pharmaceutical treatments as a 
basic benefit is required to fully address the challenge of 
availability and reasonably priced drugs.
    Our immediate challenge on behalf of older and retired Americans is 
to serve as a strong voice for the enactment of a drug benefit under 
Medicare, and for strengthening and improving Medicare and Social 
Security. For more information on the Alliance and to find out what you 
can do to help put an end to the outrageous price gouging by the 
pharmaceutical industry, we invite you to visit our website at 
www.retiredamericans.org.

        Sincerely,

                                        George J. Kourpias,
                                                          President

                                           Edward F. Coyle,
                                                 Executive Director

                            Serious Choices
    Too many older Americans are forced to choose between paying for 
their prescription drugs and buying food. But one woman's choice was 
even more critical.
    Ms. H had moved recently into Council House, a housing project for 
seniors in Maryland. One day at the elevator she met a neighbor 
awaiting a delivery from her pharmacy. The deliveryman arrived--but 
when the woman saw how much her drugs cost she sent them back. She said 
she didn't have enough money to pay for them.
    Two weeks later she was dead.
                                Summary
    Prescription drug prices are rising rapidly and are projected to 
continue to do so through at least the next decade. This increase has 
the most adverse effect on the segments of the population without some 
type of insurance protection.
    Drug spending overall is increasing largely because of three 
factors: utilization or volume increases; availability of new drugs for 
treating diseases; and rising prices for existing drugs. While a number 
of new drugs have extended and enhanced the quality of everyday life 
for many Americans, they remain too costly and out of the reach of 
millions.
    The pricing chain for drugs is complex and difficult to trace 
because much of the information regarding prices is considered 
proprietary and hence is not publicly available.
    The pharmaceutical market is unique in several ways. Manufacturers 
charge different prices for different customers and allow for discounts 
and rebates in order to maintain inclusion of their products on the 
formularies of large purchasers. It is the individual consumer without 
insurance coverage who pays the highest prices for prescription drugs.
    Drug manufacturers also enjoy a lower tax rate than other 
industries. And although they maintain that high prices for new drugs 
are justified as their recovery for research and development expenses, 
most core research for drugs is funded by the federal government, 
primarily through the National Institutes of Health. Much of the 
companies' development of drugs actually is for derivatives of existing 
drugs rather than new drugs.
    While the precise cost of drugs is difficult to pinpoint, the 
profit levels are not. In 2000, pharmaceutical companies had after-tax 
median profits of 18.6 percent, compared with 4.9 percent for all other 
Fortune 500 companies combined.
    Drug manufacturers spend more of their revenues on profits than on 
research and development--and even more on marketing. They dedicate 
more than 18 percent of revenues to profits and 30 percent to marketing 
and administration, compared with 12 percent to research and 
development.
    Promotional spending is directed toward doctors primarily through 
distribution of samples. Since 1997, direct-to-consumer (DTC) 
advertising has become a more significant part of marketing, accounting 
for $1.3 billion in advertising outlays in the first half of 2000 
alone. Drug companies also spend millions in contributions to political 
candidates and to lobby Congress.
    Almost half of all prescription drugs sold in the United States are 
generic drugs--but this accounts only for about 10 percent of the costs 
of all pharmaceuticals. Generic drugs, which cost less than brand-name 
drugs, are able to enter the market only after the brand-name company's 
patent expires. These patents often are extended by various means, 
including deals with generic companies.
    Since the enactment of Medicare 36 years ago, prescription drug 
treatment has become an essential component of medical treatment for 
older people and those with disabilities. For Medicare beneficiaries 
with serious chronic medical conditions, access to drugs is critical to 
survival and to the maintenance of an acceptable quality of life.
    The most comprehensive approach to providing affordable 
prescription drugs for all Americans is to enact a universal, national 
health care system that includes a prescription drug benefit. Among 
Medicare beneficiaries, however, a crisis over both declining coverage 
and price escalation has been a top political and medical issue. 
National and state lawmakers are exploring a variety of interim 
approaches. This primer responds to the immediate need of Medicare 
beneficiaries and discusses a number of measures being pursued toward 
the goal of affordable, comprehensive drug coverage for such 
beneficiaries.
                              Introduction
    The high costs of prescription drugs in the United States are not 
new but in recent years have made it to the front of the nation's radar 
screen. Prescription drug prices are rising rapidly, having the most 
adverse effect on the segments of the population without some type of 
insurance protection, including Medicare beneficiaries. As a policy 
issue, coverage of prescription drugs for Medicare beneficiaries became 
a major component in the 2000 presidential campaign and in many 
congressional races; it continues to be a major issue in the 107th 
Congress.
    This report attempts to present the trends and reasons why 
prescription drug prices have increased so dramatically, where the 
money goes, examine proposals to address the issue and present 
recommendations from the Alliance for Retired Americans.
Principles for a Medicare Prescription Drug Benefit
    The Alliance for Retired Americans is committed to the enactment by 
Congress of a universal, comprehensive and affordable defined 
prescription drug benefit under Medicare.
    The Medicare program is a vital and effective program on which more 
than 98 percent of older Americans and millions of persons with 
disabilities depend. However, Medicare lacks a core component of any 
comprehensive medical system--prescription drugs.
    Prescription drug prices are rising rapidly, having the most 
adverse effect on the segments of the population without some type of 
drug coverage. Older Americans spend more out of pocket than the rest 
of the population because they have more acute and chronic illnesses, 
use more prescription drugs for treatment and are less likely to have 
insurance coverage.
    Older Americans, 13 percent of the U.S. population, account for 34 
percent of all prescriptions dispensed and 42 cents of every dollar 
spent on prescription drugs. Employer-provided health coverage for 
retirees is declining, and managed care plans are capping or dropping 
drug benefits and dropping out of the Medicare+ Choice program.
    The recent proposal to give block grants to the states to create 
prescription benefits for low-income seniors would be ineffective for 
the following reasons:

   It would leave millions of moderate-income older and 
        disabled persons without protection;

   It would take years to create;

   It would give states wide latitude to restrict benefits;

   It would delay the passage of a true universal and defined 
        Medicare drug benefit; and

   The record of states in enrolling persons in the QMB and 
        SLMB programs gives little cause for optimism for expanded 
        coverage.
    The Alliance for Retired Americans believes that a Medicare 
pharmaceutical benefit must incorporate the following principles:

   Universal coverage for all who qualify for Medicare 
        benefits;

   The benefit must be comprehensive and include the most 
        current and effective treatments and quality controls;

   Enrollment in the benefit should be voluntary so that those 
        who have superior benefits can remain in their employer's plan 
        while assuring enrollment later for persons facing erosion or 
        loss of current drug benefits;

   The benefit must have affordable premiums and co-pays and 
        should protect all beneficiaries from high out-of-pocket 
        expenses;

   The benefit must not be means-tested; however, low-income 
        persons should have all costs covered;

   Dollar coverage of the benefit should be high enough to 
        protect the out-of-pocket costs of average-to-higher 
        pharmaceutical users and contain a reasonable cap on costs for 
        those with catastrophic bills;

   Employers should be required and/or provided with incentives 
        to maintain and expand the level of coverage of current, 
        employer-provided prescription drug benefits; and

   Pharmaceutical prices for all consumers must be brought 
        under some system of control, including, for example, 
        enforcement of patent limits; negotiations on fair prices by 
        the federal government where there is significant public 
        investment in drug development; and provisions to achieve price 
        discounts for Medicare beneficiaries based on the Federal 
        Supply Schedule and comparable to prices charged to larger HMOs 
        and hospital chains. Without action on the rising price of 
        pharmaceuticals, the cost of a Medicare benefit will not be 
        affordable and millions of Americans of all ages will be denied 
        their right to first-class health services.

            Recent Trends in the Price of Prescription Drugs
   According to Bureau of Labor Statistics figures, drug prices 
        rose 306 percent between 1981 and 1999, while the consumer 
        price index (CPI) rose 99 percent during the same period.\1\

   In 2000, total spending in the United States for 
        prescription drugs was $116 billion--more than twice the $51 
        billion spent in 1993. And that amount is expected to more than 
        triple to $366 billion by 2010.\2\

   Older Americans and people with disabilities spend more out 
        of pocket than the rest of the population because they have 
        more acute and chronic illnesses, use more prescription drugs 
        for treatment and are less likely to have insurance coverage. 
        Older Americans, 13 percent of the U.S. population, account for 
        34 percent of all prescriptions dispensed and 42 cents of every 
        dollar spent on prescription drugs.\3\ The average Medicare 
        beneficiary fills 18 prescriptions a year.

   Annual spending per capita in the Medicare population for 
        prescription drugs has jumped from $674 in 1996 to $1,539 in 
        2000 and is expected to climb to $3,751 in 2010, an average 
        rate of increase of 9.3 percent. Total prescription spending in 
        the Medicare population will rise from $61.2 billion in 2000 to 
        $174.4 billion in 2010, an average annual rate of increase of 
        11 percent.\4\ The Congressional Budget Office (CBO) estimates 
        prescription drug spending for Medicare enrollees will total 
        nearly $1.5 trillion over the next decade.\5\

   Although nearly one-third (30 percent) of Medicare 
        beneficiaries are expected to incur less than $250 in drug 
        expenses in 2001, more than four in 10 (43 percent) will have 
        drug expenses greater than $1,000--and 8 percent will have 
        expenses of at least $4,000.\6\

   Out-of-pocket spending for prescription drugs by Medicare 
        beneficiaries in 2001 is estimated to average about $686, with 
        20 percent expected to spend more than $1,100.\7\

   Medicare beneficiaries without prescription drug coverage 
        spend on average 83 percent more for their medicines than those 
        with drug coverage. About half of Medicare beneficiaries 
        without any form of prescription drug coverage have incomes 
        less than 175 percent of poverty, which is $15,000 in 2001.\8\

   As Social Security benefit increases are tied to the CPI and 
        prescription drug prices are increasing much faster than the 
        CPI, these trends make prescription drugs increasingly less 
        affordable for Social Security beneficiaries.
Why Are the Prices Going Up So Rapidly?
    Toward the end of the last century, changes were made in the way 
hospitals were compensated that prompted them to reduce the length of 
stay of patients. This ``quicker and sicker'' discharge from hospitals 
led physicians to increasingly rely on prescription drugs for treating 
patients. Drug interventions, in turn, forestall the hospitalization of 
many other older persons and help them to maintain lives outside of 
institutions. Consequently, the role prescription drugs play in the 
lives of older persons, in particular, has become much greater.
    There is no doubt the introduction of many new drugs has extended 
and enhanced the quality of everyday life for millions of Americans. 
Technological advances in treating diseases include the utilization of 
new drugs that can arrest or cure many cancers, heart disease, high 
blood pressure, AIDS and other life-threatening conditions. Drugs have 
contributed to reducing costs of hospitalizations and surgeries, but 
new drugs are more expensive than older drugs, and three times more 
costly than generic drugs.
    The spending increases for prescription drugs are attributed 
largely to three factors:

   Utilization increases;

   Availability of new drugs for treating diseases; and

   Rising prices for existing drugs.

    The volume of drugs sold has increased dramatically. Between 1992 
and 1998, the number of prescription drugs sold has increased 37 
percent. The 3 billion prescriptions sold in 2000 are expected to rise 
to 4 billion by 2004.\9\
    The increase in utilization or volume of drugs prescribed is 
greatly affected by promotional advertising by manufacturers.
    Manufacturers promote the use of new drug therapies in a number of 
ways. The most common practice is for thousands of drug company 
representatives to leave samples when visiting physicians and 
hospitals. Advertising directed at consumers is a relatively new 
practice that has grown considerably over the past 15 years. 
Promotional spending by drug companies reached $13.9 billion in 1999, 
an 11 percent increase from 1998 levels. Of that total, direct-to-
consumer (DTC) advertising accounted for $1.8 billion, a 40 percent 
increase from 1998.\10\
    The price of older drugs is increasing also, but at a rate of less 
than 4 percent per year. Additionally, in order to extend patents, drug 
manufacturers often will issue older drugs in new dosage forms or with 
other minor changes and charge higher prices. A Congressional Budget 
Office study found the average list price of brand-name drugs increases 
faster than inflation even after the entry of other therapeutically 
equivalent (``me too'') drugs on the market.\11\
                           Distribution Chain
    Generally, the chain of distribution begins with the manufacturer 
who distributes the drug by selling it to drug wholesalers, the 
middlemen between the manufacturer and the pharmacies. The wholesaler 
sells the drug to the retail pharmacy at the price of obtaining the 
drug plus a markup, usually between 2 percent and 4 percent. The 
pharmacist sells to the consumer at the acquisition price plus a markup 
of 20 percent to 25 percent. If the customer is insured, he or she will 
not pay the full amount, but rather a copayment of differing amounts 
depending on the insurance plan. If the customer is uninsured, he or 
she will pay the full cost or highest price for the drug.\12\




    For every dollar that a consumer pays for a prescription drug at 
the pharmacy, 74 cents goes to the drug manufacturer, 3 cents goes to 
the wholesale distributor and 23 cents to the pharmacy.\13\
                             Pricing Chain
    It is extremely difficult to identify the actual cost of a drug 
because the pricing chains are more complex than the distribution 
chain. This table summarizes key pricing terms and the levels at which 
prices are and are not publicly accessible. Some prices are not 
publicly available, as they are considered to be manufacturers' 
proprietary information.


------------------------------------------------------------------------
            PRICE                             DEFINITION
------------------------------------------------------------------------
Retail price                  The price charged by retail pharmacies to
                               individuals without insurance, known as
                               ``cash-paying'' customers.
 
Average wholesale price       The average list price that a manufacturer
 (AWP)                         suggests wholesalers charge pharmacies.
                               AWP typically is less than the retail
                               price, which will include the pharmacy's
                               own price markup. AWP is referred to as a
                               ``sticker'' price because it is not the
                               actual price that large purchasers
                               normally pay. For example, in a study of
                               prices paid by retail pharmacies in 11
                               states, the average acquisition price was
                               18.3 percent below AWP. Discounts for
                               HMOs and other large purchasers can be
                               even greater. AWP information is
                               available publicly.
 
Average manufacturer price    The average price paid to a manufacturer
 (AMP)                         by wholesalers for drugs distributed to
                               retail pharmacies. Federal Supply
                               Schedule prices and prices associated
                               with direct sales to HMOs and hospitals
                               are excluded. AMP has a benchmark created
                               by the Omnibus Budget Reconciliation Act
                               (OBRA) in 1990 to use in determining
                               Medicaid rebates and is not publicly
                               available. The Congressional Budget
                               Office (CBO) estimated AMP to be about 20
                               percent less than AWP for more than 200
                               drug products frequently purchased by
                               Medicaid beneficiaries.
 
Nonfederal average            The average price paid to a manufacturer
 manufacturer price (NFAMP)    by wholesalers for drugs distributed to
                               nonfederal purchasers. NFAMP is not
                               available publicly.
 
Federal Supply Schedule       The price available to all federal
 (FSS)                         purchasers for drugs listed on the
                               Federal Supply Schedule. FSS prices are
                               intended to equal or better the prices
                               manufacturers charge their ``most-
                               favored'' nonfederal customers under
                               comparable terms and conditions. Because
                               terms and conditions can vary by drug,
                               the most-favored customer price may not
                               be the lowest price in the market. FSS
                               prices are available publicly.
 
Federal ceiling price (FCP)   The maximum price manufacturers can charge
                               for FSS-listed brand-name drugs to the
                               Veterans Administration, Department of
                               Defense, Public Health Service and the
                               Coast Guard, even if the FSS price is
                               higher. FCP must be at least 24 percent
                               of NFAMP. FCP is not available publicly.
 
Medicaid rebate net price     The effective outpatient drug price after
                               manufacturer rebates to state Medicaid
                               programs. The basic rebate on brand-name
                               drugs is the greater of 15.1 percent of
                               the AMP or the difference between AMP and
                               the lowest or ``best'' price the
                               manufacturer charges any purchaser other
                               than Medicaid. Rebates for generic drugs
                               are 11 percent of the AMP. Rebates are
                               larger for brand-name drugs whose AMP
                               increases exceed inflation in the
                               consumer price index. Information on
                               rebate amounts is available publicly; AMP
                               and best price are not available
                               publicly.
 
VA national contract price    The price the VA has obtained through
                               competitive bids from manufacturers for
                               select drugs in exchange for their
                               inclusion on the VA formulary. Contract
                               prices are available publicly.
------------------------------------------------------------------------
Source: GAO, Prescription Drugs: Expanding Access to Federal Prices
  Could Cause Other Price Changes, August 2000

    Variations in the price can take place because of the power the 
drug companies have in their market and also because purchasers can be 
separated into groups that vary by their price sensitivity. This 
practice is known as price discrimination. Price-sensitive group health 
maintenance organizations (HMOs, see glossary), for example, would 
decrease the amount of a particular drug they purchase if the price of 
that drug increased, particularly if there are equivalent substitutions 
available. Doctors who prescribe medications and consumers with 
insurance coverage that covers most of the costs of drugs are 
considered to be price insensitive. An individual consumer without 
coverage and without bargaining power would be ``price sensitive'' to 
costs and more willing or forced either to use a substitute or decrease 
use.
    Consequently, drug manufacturers charge different prices to 
different purchasers for the same drug. Agencies of the federal 
government, state Medicaid programs and many nonfederal public health 
entities have access to substantially lower prices through the Federal 
Supply Schedule (FSS) for pharmaceuticals.
    Under the Omnibus Budget Reconciliation Act of 1990 (OBRA), drug 
manufacturers must provide rebates to state Medicaid programs for their 
outpatient drugs in exchange for Medicaid coverage. The minimum rebate 
for a brand-name drug is 15.1 percent of the average manufacturer price 
(AMP). Medicaid pays the pharmacy its acquisition price plus a 
dispensing fee and gets an average cash rebate of 19 percent to 21 
percent from the manufacturer. Favored private purchasers with their 
own outpatient pharmacies, such as HMOs and hospitals, may deal 
directly with the manufacturers and consequently pay a price lower than 
that offered to wholesalers.
    Insurers and pharmacy benefit managers (PBMs, see glossary) obtain 
both a retail discount and a rebate from the manufacturer wielding 
their bargaining power through the use of formularies, i.e. lists of 
drugs approved for use and reimbursement. It is of significant economic 
importance to manufacturers to have their drugs included in the 
formularies of large purchasers. The amount of rebates can vary 
considerably by type of arrangement and by drug. Thus, together with 
co-pays from covered beneficiaries, discounts and rebates, an insurer 
and PBM likely would pay between $30 and $44 for a drug for which the 
uninsured cash customer would pay $52. With rebates, Medicaid would pay 
about $34 for the same drug.
    Most retail pharmacies, however, do not have the bargaining power 
for discounts that other favored purchasers have, as they must stock a 
full range of drugs, not just those in specified formularies, in order 
to fill all prescriptions presented to them. At the bottom of the 
chain, it is the noninsured consumer who pays the most for a 
prescription drug.\14\
Who Pays?
    On average, Americans use about 10 prescriptions a year, but most 
do not pay full price for them. Slightly more than three in four (77 
percent) of the non-Medicare population have prescription drug 
coverage. Sixty-one percent have coverage from their employer; 11 
percent have coverage under Medicaid and 5 percent have private 
coverage. Nearly one-fourth of the non-Medicare population has no drug 
coverage, primarily because they do not have health insurance.
    Since Medicare does not have an outpatient prescription drug 
benefit, at least one in three people in the Medicare population--
approximately 13 million--have no drug coverage at all in the course of 
a year; nearly half have no coverage for at least part of an entire 
year. Employers cover prescription drugs for 24 percent of the Medicare 
population. Seventeen percent are covered by Medicare HMOs. Others rely 
on Medicaid (12 percent) and other sources (5 percent) for 
coverage.\15\ Another 8 percent purchase Medigap plans, but they must 
pay for the coverage and are subject to high administrative costs and 
high premiums as well as adverse selection.
    The prescription drug benefit has been a major reason many Medicare 
beneficiaries are attracted to Medicare HMO plans. However, many of 
them are losing their prescription drug benefit either because of the 
withdrawal of HMOs from Medicare or a decline in the number of plans 
covering the benefit. Many rural counties now have either no carriers 
or only one noncompetitive plan. At the end of 2000, more than 900,000 
Medicare beneficiaries were dropped from their HMOs; they encountered 
more difficulty finding an alternative HMO than the 700,000 who were 
dropped in 1998 and 1999. Of 237 HMOs once in the Medicare program, 
only 90 continue.\16\ A study of benefits under Medicare+ Choice plans 
during the 1999-2000 period shows there was a decline in the number of 
contracts covering prescription drugs from 73 percent to 68 
percent.\17\



    Source: Adapted from Jack Hoadley, Ph.D., Office of the Assistant 
Secretary for Planning and Evaluation (ASPE), DHHS. Presentation to 
ASPE Conference on Pharmaceutical Pricing, Utilization and Costs, 
Washington, D.C., Aug. 8-9, 2000.

    There also is evidence of decline in either the generosity of the 
benefit or an increase in cost-sharing. Seventy percent of plans have 
an annual $1,000 or less limit on drugs and 32 percent have caps of 
$500 or less per enrollee.\18\ A survey of enrollees in Medicare HMOs 
found that 72 percent of them saw their annual HMO premiums increase by 
at least $500 within one year.\19\
    Similarly, employer coverage for retirees and the scope of their 
benefits has been declining in the past decade because of rising costs. 
Among employers with more than 200 workers offering retiree health 
benefits, 67 percent offered them to Medicare-eligible retirees in 
2000, down from 80 percent in 1999, a 16 percent decline. Sixty-seven 
percent of firms of all sizes report that higher spending for drugs 
contributed ``a lot'' to increases in health insurance premiums in 
2000.\20\ Another survey of employers reports that drug costs 
represented 40 percent to 60 percent of employers' retiree plan costs. 
Large employers (1,000 employees) are most likely to offer retiree 
health plans. However, 40 percent of them are seriously considering 
cutting back on drug benefits for their retirees in the next three to 
five years and 30 percent would consider terminating coverage 
prospectively for retirees ages 65 and older.\21\
    Consequently, the number of Medicare beneficiaries without 
prescription drug coverage can be expected to grow considerably, 
leaving millions more to pay the highest prices for their 
prescriptions.
             The Money Chain: How Are Drug Revenues Spent?
    Drug manufacturers devote more of their revenues to profits and 
marketing than to research and development (R&D). The 12 drug companies 
with the highest revenues spent three times as much on marketing as on 
R&D in 2000. More than 18 percent of revenues are dedicated to profits, 
compared with 12 percent spent on R&D and 30 percent on marketing and 
administration.\22\
Profits
    The pharmaceutical market differs from other markets in a number of 
ways:

   There is a ready demand for the old as well as the higher-
        priced new therapeutic products, so marketing is intense;

   There is insurance coverage and subsidization for the 
        product;

   Government pays for a substantial share of research that 
        leads to drug development;

   There is government compliance in supporting drug monopolies 
        through allowing market exclusivity under a patent and the 
        extension of patents; and

   There are hidden prices, discounts and rebates.\23\

    The pharmaceutical market differs also in the profits the industry 
makes compared with others. As can be seen in the following chart, data 
from the list of Fortune 500 companies show that in 2000, the after-tax 
median profits of pharmaceutical companies was 18.6 percent, higher 
than any other industry and considerably higher than the median after-
tax profit level of 4.9 percent for the other Fortune 500 companies 
combined. This translates into $192 billion in revenues and $28 billion 
in profits in 2000 for drug companies. In fact, Fortune magazine places 
the pharmaceutical companies at the top in two of three categories--
returns on revenues and returns on assets--and second in returns on 
shareholders' equity.\24\




    Source: FORTUNE magazine

    Not only are pharmaceutical companies more profitable than other 
industries, they also have a lower tax rate. There are five federal tax 
provisions that result in greater tax savings for the drug companies 
than other major industrial categories. A Congressional Research 
Service report found that while the average tax rate for all industries 
was 27.3 percent between 1993 and 1996, the rate for drug companies was 
only 16.2 percent.\25\
Research and Development
    Although pharmaceutical companies claim the prices of new drugs are 
necessary to fund ongoing research and development, it is the federal 
government, primarily through the National Institutes of Health (NIH), 
that pays for the majority of the initial drug research in the United 
States.
    A congressional committee found that of the 21 most important drugs 
introduced between 1965 and 1992, 15 were developed using knowledge and 
techniques originating in federally funded research.\26\ A team of 
journalists from The Boston Globe looked at 50 top-selling drugs 
approved by the FDA over a five-year period. Thirty-five were new 
bestseller drugs that the FDA considered most important or most unique, 
and 15 were so-called ``orphan'' drugs that treat rare diseases. 
Thirty-three of the 35 new drugs and 12 of the 15 orphan drugs received 
money from NIH or the FDA to help in discovery, development or 
testing.\27\
    Drug manufacturers also maintain that the most expensive aspect of 
their research is in the clinical trials,\28\ yet NIH and other federal 
agencies are sponsoring 60 percent of current clinical trials and the 
industry is sponsoring just 11 percent.\29\
    During the 1980s and early 1990s, NIH required drug companies to 
charge a ``fair and reasonable'' price for drugs originally developed 
by taxpayer-funded research and development. This requirement was 
dropped by NIH in 1995. Reinstatement of this requirement is part of a 
proposal now in Congress, but it may not have sufficient support in the 
face of intensive industry lobbying.
    In addition, a review of the government's invention reporting 
system shows NIH does not keep track of the drugs invented with 
taxpayer monies; NIH tracks its spending by disease, not by 
drug.30, 31
    Much of drug manufacturers' development of drugs is not for 
new drugs but rather copies of existing drugs. This is particularly 
important to them, as a number of patents are expiring between 2000 and 
2004.
    Until 1992, the FDA classified every new drug it approved according 
to its significance for human health. One classification was 1C, 
meaning little or no therapeutic gain, since a drug so ranked was a 
duplicate of products already available. During the period from 1982-
1991, more than half of newly approved drugs (53 percent) were 1C or 
copycat drugs, indicating that much of drug manufacturers' so-called 
research and development of drugs is actually of the ``me too'' 
variety--therapeutically equivalent drugs. Thirty-one percent of the 
approved drugs were classified as modest therapeutic gain, such as a 
change in formulation, so the drug could be taken less frequently. Only 
16 percent were ranked as important therapeutic gain or a breakthrough 
drug. Because of industry pressure, the Bush administration eliminated 
these rankings in 1992.\32\
    In the 1990s, the FDA approved 857 new drug applications. More than 
one-third (311) were new molecular entities (NMEs), compounds that have 
never been sold on the U.S. market. Nearly half (426) were ``new 
formulations'' or ``new combinations'' of compounds already approved. 
New formulations consist of active ingredients already on the market 
that have been modified; new combinations contain two or more 
previously approved active ingredients in a new single medicine.\33\
Marketing
    Pharmaceutical companies' promotional spending directed toward 
doctors and consumers topped $8 billion in the first six months of 
2000, up 14.3 percent for the same period in 1999. The industry employs 
one of the largest sales forces among all manufacturing sectors. 
Distribution of prescription samples to doctors accounted for nearly 50 
percent of promotional spending. Nearly half of the samples (45.1 
percent) were given to patients over the age of 60.\34\
    Changes to FDA policy in 1997 have allowed drug manufacturers to 
expand advertising via mass media to consumers. Direct-to-consumer 
(DTC) advertising, primarily through television ads, totaled $1.3 
billion for the first half of 2000 only, compared with $1.3 billion for 
all of 1998 and $1.8 billion for 1999.\35\
    The direct-to-consumer advertising and dispensing of free brand 
samples by physicians generate market demand whereby consumers are 
introduced to and encouraged to request the brand-name drugs from their 
physicians. In a telephone poll conducted in 2000, 91 percent of 
Americans said they had seen or heard an advertisement for prescription 
drugs in the past year; 34 percent said they had talked with their 
doctor about a specific medicine they saw or heard advertised; and 7 
percent said they asked their doctor to prescribe a medicine they saw 
advertised.\36\ DTC ads can produce significant returns. In the first 
10 months of 2000, pharmaceutical companies Merck and Pfizer together 
spent $206 million combined on advertising for their arthritis drugs, 
Vioxx and Celebrex respectively, resulting in combined sales of $3.7 
billion.\37\
Lobbying
    The drug industry spends a considerable amount on lobbying efforts 
to protect their interests. Overall, the industry spent $278.5 million 
from 1997 to mid-2000 lobbying the Clinton administration and members 
of Congress on both sides of the aisle. During this period, nearly 300 
lobbyists, many former members of Congress or former congressional/
administration staffers, were hired to fight bills that would control 
their prices and limit their profits.\38\ During the 2000 election 
cycle, pharmaceutical companies contributed $26 million to 
congressional and presidential campaigns, about 30 percent to 
Democratic candidates and 70 percent to Republican candidates.\39\
    In addition, drug companies are financial backers of such front 
groups as ``Citizens for Better Medicare.'' In 2000, CBM waged a $50 
million ad campaign against a prescription drug benefit under the 
Medicare program.\40\ Also, at least $20 million was funneled through 
the U.S. Chamber of Commerce during the 2000 election cycle for ads 
defending candidates who oppose governmental solutions to the high 
costs of drugs and attacking members of Congress who favored a 
universal Medicare benefit and systems designed to moderate drug 
prices.\41\
            Why Not Have More Substitution of Generic Drugs?
    During the 1950s and 1960s, drug manufacturers persuaded doctors to 
prescribe brand-name drugs and state legislatures to prevent 
pharmacists from substituting generic drugs. Those laws were repealed 
during the 1970s and the drug companies then turned their attention to 
protecting their interests by obtaining patent extensions and using 
loopholes to stall the introduction of generic drugs.\42\ For example, 
many patents on drugs can be extended beyond the 17 years of a patent 
by altering dosages or shapes of the drugs for the sole purpose of 
obtaining another patent on essentially the same drug. Companies also 
are able to acquire 30-month extensions on brand patents when they 
obtain FDA approval to switch the patented prescription drug to an 
over-the-counter drug. During the extension periods, generic drug 
makers thereby are prevented from introducing their products.
    In 1984, Congress attempted to keep drug prices down through the 
Drug Price Competition and Patent Term Restoration Act--also called the 
Hatch-Waxman Act. The intent of this legislation was to speed up the 
entry of generic drugs and encourage competition between companies 
producing generic and brand-name drugs. When the first generic is 
allowed to enter the market after expiration of a patent, it has six 
months' exclusivity and its price is 75 percent to 80 percent of the 
brand. After other generics are allowed to enter the market, within a 
12- to 18-month period, the average generic drug price will be one-
third the price of the brand-name drug price.\43\ As part of a 
legislative compromise, the Act allows for brand patent extensions 
based on time spent in the FDA review process.
    Today, more than 40 percent of all prescription drugs sold in the 
United States are off-patent generic drugs, but the dollar share of the 
market is less than 10 percent, indicating how far less costly generic 
drugs are.\44\ However, a Congressional Budget Office study shows that 
increased competition from generics has not reduced the profitability 
of the prescription drug industry.\45\
    In recent years, the intent and benefits of the Hatch-Waxman law 
have been undermined by generic as well as brand companies. Through 
federal investigations or lawsuits, several cases have come to light in 
which brand companies have made agreements with generic companies. 
Typically, the generic company agrees not to produce the generic drug 
in return for substantial compensation from the brand-name 
company.46, 47
    In applying for approval from the FDA, generic drug firms are 
hampered by having to address nearly every aspect of a brand-name 
patent in the FDA's registry, including patents on such nonessential 
features as color, size, shape and types of containers. Another 
obstacle is the practice by brand-name companies of filing ``citizens 
petitions'' that require FDA investigation of issues raised in the 
petition. Citizens petitions originally were created to allow 
individuals to voice concerns to the FDA about the safety or efficacy 
of a generic drug. However, the drug firms abuse this provision by 
filing petitions for the purpose of delaying entry of generic 
competition.
    Currently, drug patents in force prior to June 8, 1995, have a term 
of either 17 years from date of issuance of the patent award or 20 
years from the date of filing an application for a patent, whichever is 
longer, plus allowance for up to a five-year extension under the 
Waxman-Hatch Act. Under the Uruguay Round Agreements Act (URAA) of 
1994, patents issued after June 8, 1995, have a term of 20 years from 
date of filing plus allowance for a five-year extension for court 
appeals, interference actions and certain other delays. The effective 
patent life, the portion of patent term remaining after clinical 
testing and FDA review, generally is less. Nevertheless, the average 
effective patent life of many drugs has increased by 50 percent over 
the past two decades. The Hatch-Waxman Act, URAA and other laws could 
add 4.4 to 5.9 years to effective patent lives of some new drugs, for a 
total of 13.9 to 15.4 years.\48\
                           Proposed Solutions
    Aside from plans that would expand or provide an affordable 
prescription drug benefit for seniors, a number of proposals have been 
made to alleviate the high cost of prescription drugs and check the 
growth in prices. A partial list includes:

   Allow the re-importation of drugs by pharmacies and health 
        plans;

   Require drug companies to give local pharmacies the ``best'' 
        price they give their most favored customers, or the average 
        foreign price;

   Enact state initiatives to control prices;

   Close loopholes in the Hatch-Waxman Act that allow brand-
        name drug companies to obstruct entry of generic competitors;

   Elevate cost-consciousness of doctors and patients;

   Reinstate requirement for ``reasonable pricing'' on products 
        that were researched and developed using taxpayer monies via 
        NIH;

   Authorize the federal government to buy drugs in bulk and at 
        discount for Medicare beneficiaries;

   Open the market to more competition by shortening the length 
        of patents and/or eliminating the practice of patent 
        extensions;

   Enact compulsory licensing; and

   Authorize the NIH to develop a yardstick for comparing 
        prices.
Allow the re-importation of drugs by pharmacies and health plans.
    In the past, only drug manufacturers were allowed to re-import 
drugs made in the United States from countries where the drugs are 
available at lower prices.
    A provision allowing the re-importation of FDA-approved 
prescription drugs was included in the FDA and Agriculture Department 
appropriations bill (H.R. 4461) passed by Congress and signed by 
President Clinton Oct. 28, 2000. It included $23 million in funding for 
FDA implementation in the first year. However, Health and Human 
Services Secretary Donna Shalala did not request the monies to begin 
the program because of ``flaws and loopholes.'' Some members of the 
107th Congress have asked President Bush to proceed with 
implementation.
    Many in Congress and others have opposed the measure on the basis 
of the ``loopholes'' rather than the concept. That is, drug companies 
can refuse to allow re-importers to use the FDA-approved labels on 
their products, effectively blocking re-importation. The measure also 
does not prevent drug companies from imposing restrictive contract 
terms on foreign distributors, and a sunset stipulation ending the re-
importation system after five years is seen as a disincentive for 
public and private investment in the program. There is also concern 
that the benefits of the Prescription Drug Marketing Act (PDMA) of 1987 
are undermined. PDMA protects consumers from foreign counterfeits and 
improper storage in foreign countries. Legislation (H.R. 1512) has been 
proposed in the 107th Congress to close most of the loopholes.
Require drug companies to give local pharmacies the ``best'' price they 
        give their most favored customers, or the average foreign 
        price.
    Legislation introduced in the 107th Congress (S. 125, H.R. 1512) 
would make it possible for pharmacies to purchase drugs for seniors and 
disabled persons on Medicare at the lowest price pharmaceutical 
manufacturers give to such federal agencies as the Veterans 
Administration and military treatment facilities. A report from the 
federal General Accounting Office concluded that enactment of this 
proposal would not necessarily control the increase in drug prices 
overall, because drug companies likely would raise their prices to the 
federal agencies to offset losses in the reduction of prices to 
Medicare beneficiaries.\49\ However, an increase in the volume of drugs 
sold would be sufficient to compensate the drug firms for the reduced 
prices. One analysis of a similar bill estimates that after adjusting 
for increased utilization, the net drop in total pharmaceutical 
industry revenues would be just 3.3 percent.\50\ A variation on this 
proposal, also introduced in the 107th Congress (S. 699, H.R. 1400), 
would allow pharmacies to purchase the drugs at the average price at 
which the drugs are sold in other developed nations.
Enact state initiatives to control prices.
    A number of states have taken on the problem of high prescription 
drug costs, largely because of inertia on the national level. More than 
40 states considered legislation to lower prescription drug costs in 
their 2001 sessions.
    The state of Maine enacted the ``Maine Rx Program'' in 2000, which 
would have allowed the state to negotiate lower drug prices with drug 
manufacturers for Maine residents who lack prescription drug coverage. 
Drug companies found guilty of overcharging for drugs or restricting 
supplies would have incurred fines. The law also authorized the state 
to establish price caps. The Pharmaceutical Research and Manufacturers 
of America (PhRMA) filed a lawsuit challenging the constitutionality of 
the law. The case has subsequently moved through the courts. In May, 
2001, a federal appeals court ruled in favor of Maine. PhRMA has 
appealed the case to the U.S. Supreme Court.\51\
    Legislation has been introduced in a number of other states 
focusing on lowering pharmaceutical costs by various means. Thirty-four 
states plan to create rebate or discount prescription drug cards in 
2002 and 32 states are considering purchasing pools.\52\
    Several states have already formed bulk purchasing alliances to 
negotiate lower prices for segments of their populations, such as 
Medicaid recipients or public employees. Attorneys general in several 
states are considering or taking legal action to require drug companies 
to lower prescription drug prices. At least two states have filed 
lawsuits charging pharmaceutical companies with illegally inflating 
prices.\53\
Close loopholes in the Hatch-Waxman Act that allow brand-name drug 
        companies to obstruct entry of generic competitors.
    Legislation introduced in the 107th Congress (S. 812) would 
streamline the approval process for generic drugs from the FDA. If a 
brand-name firm pays a generic firm to stay off the market, that 
company's 180-day market exclusivity as first generic would roll over 
to the next generic applicant. The measure also addresses abuse of 
``citizens petitions.''
Elevate cost-consciousness of doctors and patients.
    Survey data indicate that current Medicare beneficiaries rely on 
their physicians for guidance regarding selection of drugs. 
Furthermore, generic companies do not promote their products to doctors 
as brand-name companies do.
    To enhance doctor and patient decision making and to ensure patient 
safety, Rx Health Value, a coalition of insurers, unions, private 
employers, academics and consumer and senior advocacy groups, 
recommends independent research to provide usable, reliable data for 
practitioners and consumers in deciding on the use of new drugs and how 
to evaluate relative merits of different drugs within the same 
class.\54\ Another recommendation is to publicly fund an independent 
organization as a reliable source of information on the quality of 
generic drugs and the equivalence across brand-name drugs in the same 
drug categories.\55\ Presumably, doctor and consumer education also 
will lead to increased price sensitivity without coercion.
Reinstate requirement for ``reasonable pricing'' on products that were 
        researched and developed using taxpayer monies via NIH.
    In effect, this would eliminate the subsidy supplied to the drug 
makers. An amendment to that effect was passed in the House in the 
106th Congress by a vote of 313-109. It is included in other drug cost-
containment legislation (H.R. 1512) introduced in the 107th Congress. 
However, reinstatement of the requirement may not allow for 
retroactivity, meaning it would not apply to products already on the 
market. Additionally, NIH's reporting system needs to be shored up 
considerably for this requirement to be effective.
Authorize the federal government to buy drugs in bulk and at discount 
        for Medicare beneficiaries.
    The Health Care Financing Administration (HCFA), which administers 
the Medicare program, could be given the authority to negotiate price 
reductions with pharmaceutical companies much as it does with such 
providers as hospitals, doctors and nursing homes. HCFA also could be 
authorized to use the prescription drug fee schedule the Veterans 
Affairs Department and other federal agencies have negotiated with the 
drug makers.\56\
Open the market to more competition by shortening the length of patents 
        and/or eliminating the practice of patent extensions.
    This approach actually might produce greater technological 
breakthroughs because, without the 17 to 20 years of exclusivity on 
patents, the drug manufacturers would have greater incentive to develop 
the next money-making drug. Patents spur innovation, but so do their 
expiration. Once a drug manufacturer has a blockbuster drug, it is 
inclined to protect the patent on that drug as long as possible, 
including making copycat drugs, in order to continue reaping 
substantial profits. Closing loopholes on patent extensions could shift 
attention to new research.\57\
Enact compulsory licensing.
    This option is discussed most recently in regard to measures 
African countries and Brazil are taking to obtain drugs for treating 
citizens with AIDS and HIV. A 1994 international trade agreement 
protecting intellectual property grants 20-year patents to drug 
manufacturers. However, compulsory licensing allows a government in a 
national emergency to license local or other manufacturers to produce 
cheaper versions of drugs whose patents are held by multinational 
companies. Compulsory licensing in the United States could take the 
form of allowing the originator of the drug to have a monopoly for a 
few years with no extensions, then compelling that company to license 
the drug to other manufacturers in return for a royalty payment.
Authorize the NIH to develop a yardstick for comparing prices.
    The NIH could be designated the federal agency for developing, 
testing and producing new medicines. Using this experience to measure 
costs of research and development, NIH would be in a position to gauge 
whether prices charged by manufacturers are reasonable or excessive. 
Federal and state agencies then would contract only with manufacturers 
whose prices were reasonable.\58\
    A variation on this would be to endow a private, nonprofit 
institute as an independent source of research to verify whether drugs 
are new or just variations of old drugs.\59\
                               Conclusion
    Whatever solution or solutions are devised and implemented, the 
excessive rise in prices indicates that immediate action is necessary.
    All developed countries that have lower drug prices than the United 
States also have some form of universal health insurance coverage. 
While the presence of insurance coverage increases utilization and 
expenditures for prescription drugs, it also provides the means and 
incentives for governments to control expenditures. For Medicare 
beneficiaries, the urgent need for such coverage is self-evident, as is 
the need for mechanisms to assure the affordability of such a benefit.
    Ultimately, the best and most comprehensive approach to providing 
affordable prescription drugs for all the American people is to enact a 
universal, national health system based on a single-payer financing 
model.

Glossary of Key Prescription Drug Pricing Terms
    Average manufacturer's price (AMP). Average price paid by 
wholesalers to manufacturer. Established by manufacturers as a 
suggested list price for wholesalers selling to pharmacies. Also called 
the wholesaler acquisition cost (WAC).
    Average wholesale price (AWP). Published wholesale price (``list 
price'') suggested by the drug manufacturer. It is comparable to a 
sticker price on an automobile.
    Cost-sharing. Consumers pay a portion or percentage of the price. 
Co-payments are consumer payments of a fixed cost per prescription (for 
example, $5); co-insurance is payment of a proportion of costs (perhaps 
20 percent). (See Tiers below.)
    Discount. The price lower than the base price paid by certain 
purchasers to the retail pharmacy; amount is negotiated.
    Formulary. List of drugs approved for use or payment--in other 
words, covered or reimbursable drugs. An open formulary includes all 
drugs; a restricted or closed formulary covers only the listed drugs. A 
partially closed formulary specifies drugs covered but allows 
exceptions with prior approval and/or with increased co-payments.
    Generic drug. A generic drug is one that is chemically identical 
and bioequivalent to the brand-name drug. FDA approval requires that a 
generic drug must be absorbed into the body at essentially the same 
rate and to the same extent as the brand-name drug.
    Health maintenance organization (HMO). A structure for providing 
managed care resulting in lower costs. HMOs under the Medicare+ Choice 
program are paid a fixed monthly amount adjusted for beneficiary's age, 
gender, institutional status and Medicaid enrollment. They typically 
yield lower costs and provide benefits, such as prescription drugs, not 
covered under Medicare for enrolled participants.
    Indemnity coverage. As it pertains to prescription drugs, the 
insured pays for the prescription and then is reimbursed or indemnified 
by the insurance plan.
    Launch price. The price of a new drug as established by a 
manufacturer when the drug is introduced on the market.
    Market power. The degree to which a company exercises influence 
over the price and output in a particular market. Market power is 
related to the availability of substitute products. A drug manufacturer 
with a patent on an unrivaled drug has great market power.
    Monopoly. A market in which there is only one supplier. A drug 
manufacturer with a drug patent has a monopoly on that drug. The patent 
protects the manufacturer from competition of chemically identical (but 
not therapeutically equivalent) drugs and allows it to set the market 
price.
    Oligopoly. A market in which relatively few firms have significant 
influence over the price of a product in the market, such as when two 
or three drugs dominate a therapeutic category.
    Patent. A patent on a drug protects it from replication competition 
for a number of years. The effective patent life is the portion of the 
patent term remaining after safety and efficacy testing, clinical 
trials and FDA approval for marketing.
    Pharmacy benefit managers (PBMs). Private companies that contract 
with health plans to arrange discounts from retail pharmacies and 
manage distribution of drugs. They may also perform such functions as 
paying claims and negotiating price discounts via rebates.
    PhRMA. Pharmaceutical Research and Manufacturers of America, an 
association of prescription drug manufacturers.
    Price discrimination. The selling of the same product to different 
purchasers at different prices.
    Price sensitivity. Refers to the extent to which a purchaser would 
change the amount of a product it would buy if the price of that 
product should rise or fall.
    Rebate. Money that is returned to the purchaser by the seller after 
the purchase has taken place. Usually a percent of the value of the 
drug dispensed.
    Retail price. The price charged by retail pharmacies to individuals 
without insurance, known as ``cash-paying'' customers.
    Therapeutically equivalent drugs. Drugs that perform the same 
function as another drug even though they may be different chemically. 
Therapeutically equivalent drugs can be in competition with each other 
for listing on formularies.
    Tiers of co-payments. Refers to the co-payment amount health plans 
may require for purchasing drugs from a formulary with the purpose of 
encouraging the use of generic drugs. The first tier co-payment would 
be for generic drugs and require the lowest co-payment, for example $1; 
the second tier would be for brand-name drugs listed on the formulary 
with a co-payment of $10, for example; the highest co-payment would be 
for drugs not listed on the formulary, perhaps $20.
Endnotes
    \1\ Bureau of National Affairs. Special Health Care Policy Report: 
Drug Prices. Vol. 8, No. 19. (May 8, 2000)
    \2\ Health Care Financing Administration. National Health Care 
Expenditures Projections: 2000-2010. (March 2001) [www.hcfa.gov]
    \3\ Families USA. Cost Overdose: Growth in Drug Spending for the 
Elderly, 1992-2010. (July 2000) [www.familiesusa.org]
    \4\ Congressional Research Service. Medicare Prescription Drug 
Coverage for Beneficiaries: Background and Issues. (Jan. 26, 2001)
    \5\ Congressional Budget Office. Laying the Groundwork for a 
Medicare Prescription Drug Benefit. Statement of Daniel L. Crippen, 
Director, before Subcommittee on Health of the House Ways and Means 
Committee. (March 27, 2001)
    \6\ Kaiser Family Foundation. The Medicare Program: Medicare and 
Prescription Drugs. Fact Sheet. (February 2001)
    \7\ Ibid.
    \8\ Ibid.
    \9\ Bureau of National Affairs. Special Health Care Policy Report: 
Drug Prices. Vol. 8, No. 19. (May 8, 2000)
    \10\ Noonan, David. Why Drugs Cost So Much. Newsweek. (Sept. 25, 
2000)
    \11\ Congressional Budget Office. How Increased Competition from 
Generic Drugs Has Affected Returns in the Pharmaceutical Industry. 
(July 1998) [www.cbo.gov]
    \12\ U.S. Department of Health and Human Services. Prescription 
Drug Coverage, Spending, Utilization, and Prices. Report to the 
President (April 2000). [aspe.hhs.gov/health/report/drugstudy]
    \13\ Kaiser Family Foundation. Prescription Drug Trends: A 
Chartbook by Kreling DH, Mott DA, Widerhold JB, Lundy J, Levitt L. 
(July 2000) [www.kff.org]
    \14\ U.S. Department of Health and Human Services. Prescription 
Drug Coverage, Spending, Utilization, and Prices. Report to the 
President. (April 2000) [aspe.hhs.gov/health/report/drugstudy/exec.htm]
    \15\ Public Citizen. D.C. Area Consumers Pay More for Prescription 
Drugs While Pharmaceutical Profits Soar. (Oct. 24, 2000)
    \16\ Weiss Ratings. Few Options Available for the Nearly One 
Million Seniors To Be Dropped from HMOs by Year-End. 
[www.weissratings.com]
    \17\ Cassidy, Amanda, Gold, Marsha. Medicare Choice in 2000: Will 
Enrollees Spend More and Receive Less? Commonwealth Fund. (August 2000) 
[www.cmwf.org]
    \18\ U.S. Department of Health and Human Services. Prescription 
Drug Coverage, Spending, Utilization, and Prices. Report to the 
President. (April 2000) [aspe.hhs.gov/health/report/drugstudy/exec.htm]
    \19\ Medicare Rights Center. Trying to Fill the Medicare Gaps. 
(Winter 2000) [www.medicarerights.org]
    \20\ Kaiser Family Foundation and Health Research and Educational 
Trust. Employer Health Benefits 2000 Annual Survey.
    \21\ Hewitt Associates. Retiree Health Coverage: Recent Trends and 
Employer Perspectives on Future Benefits. Report prepared for Henry J. 
Kaiser Family Foundation. (October 1999)
    \22\ Public Citizen. Drug Industry Most Profitable Again: New 
Fortune 500 Report Confirms ``Druggernaut'' Tops Other Industries in 
Profitability Last Year, 2001.
    \23\ Schondelmeyer, Stephen. Role of Price Transparency in the 
Pharmaceutical Market. Presentation to ASPE Conference on 
Pharmaceutical Pricing, Utilization, and Costs, Washington, D.C., Aug. 
8-9, 2000.
    \24\ FORTUNE magazine. [www.fortune.com]
    \25\ Congressional Research Service. Federal Taxation of the Drug 
Industry from 1990 to 1996, Memorandum to Joint Economic Committee. 
(Dec. 13, 1999)
    \26\ Congressional Joint Economic Committee Report. The Benefits of 
Medical Research and the Role of the NIH. (May 2000)
    \27\ The Boston Globe. Public Handouts Enrich Drug Makers, 
Scientists. (April 5, 1998)
    \28\ PhRMA, Pharmaceutical Industry Profile 2000. [www.phrma.org/ 
publications]
    \29\ National Institutes of Health. Linking Patients to Research. 
[clinicaltrials.gov]
    \30\ The Boston Globe. Public Handouts Enrich Drug Makers, 
Scientists. (April 5, 1998)
    \31\ U.S. General Accounting Office. Technology Transfer: Reporting 
Requirements for Federally Sponsored Inventions Need Revisions. (August 
1999)
    \32\ Public Citizen. Why the Pharmaceutical Industry's ``R&D Scare 
Card'' Does Not Justify High and Rapidly Increasing U.S. Drug Prices. 
(Jan. 26, 2000)
    \33\ National Institute for Health Care Management. Prescription 
Drugs and Intellectual Property Protection. (August 2000)
    \34\ IMS HEALTH, U.S. Pharmaceutical Promotional Spending Topped $8 
Billion in First-Half 2000 and, Pharmaceutical Direct-To-Consumer Ad 
Investment in U.S. Reaches $1.3 Billion in First-Half 2000. (October 
2000) [www.imshealth.com]
    \35\ National Institute for Health Care Management. Prescription 
Drugs & Mass Media Advertising. (September 2000)
    \36\ ``The NewsHour'' with Jim Lehrer/Kaiser Family Foundation/
Harvard School of Public Health. National Survey on Prescription Drugs. 
(September 2000)
    \37\ IMS HEALTH, U.S. Pharmaceutical Promotional Spending Topped $8 
Billion in First-Half 2000 and, Pharmaceutical Direct-To-Consumer Ad 
Investment in U.S. Reaches $1.3 Billion in First-Half 2000. (October 
2000) [www.imshealth.com]
    \38\ Public Citizen. Addicting Congress: Drug Companies' Campaign 
Cash & Lobbying Expenses. (July 2000) [www.citizen.org]
    \39\ Center for Responsive Politics. Pharmaceuticals/Health 
Products: Top Contributors, and, Long-Term Contribution Trends. 
[www.opensecrets.org/industries]
    \40\ The New York Times. With Quiet, Unseen Ties, Drug Makers Sway 
Debate. (Oct. 5, 2000)
    \41\ The Wall Street Journal. Drug Firms Underwrite U.S. Chamber's 
TV Ads. (Oct. 6, 2000)
    \42\ Surowiecki, James. Big Pharma's Drug Problem. The New Yorker. 
(Oct. 16 and 23, 2000)
    \43\ Schondelmeyer, Stephen. Prescription Drugs: Demystifying the 
Industry. Presentation to Health Action 2001 National Grassroots 
meeting. (Jan. 27, 2001)
    \44\ National Institute for Health Care Management. Prescription 
Drugs and Intellectual Property Protection. (August 2000)
    \45\ Congressional Budget Office. How Increased Competition from 
Generic Drugs Has Affected Returns in the Pharmaceutical Industry. 
(July 1998) [www.cbo.gov]
    \46\ The New York Times. Medicine Merchants Holding Down the 
Competition: How Companies Stall Generics and Keep Themselves Healthy. 
(July 23, 2000)
    \47\ Federal Trade Commission. Health Care Antitrust 
Report...Health Care Services and Products. [www.ftc.gov/bc/hcindex/
conduct.htm]
    \48\ National Institute for Health Care Management. Prescription 
Drugs and Intellectual Property Protection. (August 2000)
    \49\ Merrill Lynch. A Medicare Drug Benefit: May Not Be So Bad. 
(June 23, 1999)
    \50\ U.S. General Accounting Office. Prescription Drugs: Expanding 
Access to Federal Prices Could Cause Other Price Changes. (August 2000)
    \51\ Academy for Health Services Research and Health Policy. State 
of the States. State Coverage Initiatives. (January 2002) 
[www.statecoverage.net]
    \52\ Bureau of National Affairs. Northeast Lawmakers to Discuss 
Prescription Drug Pricing Issues. Vol. 10, No. 10. (March 11, 2002)
    \53\ Bureau of National Affairs. State Sues Pharamaceutical 
Companies Charging Inflation of Prescription Drug Prices. Vol. 10, No. 
9. (March 4, 2002)
    \54\ Rx Health Value: The Independent Information Center. 
[RxHealthValue
@aol.com]
    \55\ Moon, Marilyn. Prescription Drugs as a Starting Point for 
Medicare Reform. Testimony before the Senate Budget Committee. (Feb. 
15, 2001)
    \56\ Public Citizen. D.C. Area Consumers Pay More for Prescription 
Drugs While Pharmaceutical Profits Soar. (Oct. 24, 2000)
    \57\ Surowiecki, James. Big Pharma's Drug Problem. The New Yorker. 
(Oct. 16 and 23, 2000)
    \58\ Mintz, Morton. Still Hard to Swallow. The Washington Post. 
(Feb. 10, 2001) (Jan. 2, 2001)
    \59\ Reinhardt, Uwe. How to Lower the Cost of Drugs, The New York 
Times. (Jan. 2, 2001)
                About the Alliance for Retired Americans
    The Alliance for Retired Americans is a new senior advocacy 
organization that was created in January 2001 by national and local 
affiliates of the AFL-CIO, together with community-based organizations, 
to provide a voice for the rapidly growing numbers of union retirees 
and older Americans.
    The mission of the Alliance for Retired Americans is to ensure 
social and economic justice and full civil rights for all citizens so 
they may enjoy lives of dignity, personal and family fulfillment and 
security. The Alliance believes that all older and retired persons have 
a responsibility to strive to create a society that incorporates these 
goals and rights; and that retirement provides them with opportunities 
to pursue new and expanded activities with their unions, civic 
organizations and their communities. The Alliance's public policy and 
legislative goals will be achieved through mobilization of members in 
an extensive grassroots network in every region, state and district in 
the country.
Acknowledgments
    This report was researched and written by Dianna M. Porter, public 
policy analyst with the Alliance for Retired Americans. Ms. Porter 
previously worked as public policy director at the Older Women's League 
and National Council on the Aging, and as a professional staff member 
with the U.S. Senate Special Committee on Aging. More recently, she 
assisted the government of Macedonia in the development of a private 
pension system. Ruby Scott and Brenda Brooks assisted Ms. Porter in 
preparing the original manuscript for this report.
                              Case Studies
Coverage Doesn't Mean Full Coverage--Ms. M of Suitland, Md., has 
congestive heart disease and is required to take 10 medications. Even 
though she is under a Medicare HMO, she pays full payments and co-
payments of about $300 per month. The HMO plan has a cap of $1,000 per 
year for prescription drugs. When Ms. M surpasses that amount in June, 
she must assume the total costs of her prescriptions. She is ineligible 
for her state's drug assistance program because her income is just 
above the allowable level of 116 percent of poverty.

Prescription Drug Costs Lead to Impoverishment--Ms. FM of Rossville, 
Ga., is 73 and widowed. Her annual prescription drug costs are about 
$4,200 ($350 per month). Her income is $608.50 a month--$569 from 
Social Security and $39.50 from her husband's pension. She has had both 
a heart attack and a hiatal hernia. She lost her insurance coverage and 
used her savings to pay for prescriptions, to the point where she 
doesn't have enough to pay her Medicare premiums. Fortunately, Family 
Services pays for her Medicare premiums now.

Limited Coverage Lost When HMO Fails--Ms. D of Lebanon, Tenn., has 
annual prescription drug costs of $2,900. In September 1998, Ms. D was 
forced to join an HMO or pay for all of her supplemental insurance, 
which she could not afford. She had a minimal prescription drug 
benefit, but the HMO folded in January 2001. Ms. D's pension is $322.50 
a month and her Social Security is $538 a month. ``It isn't always easy 
skimping and scraping to stay on top,'' she says.

Health Plan Coverage Not Enough--Mr. and Ms. R of Lansing, Ill., have 
annual prescription drug costs of more than $4,000. They do not have 
prescription drug coverage because it would cost about $2,000 to 
$3,000, while the policy would only pay about $1,600.

Some Must Rely on Samples--Ms. N of Los Angeles is 87 and widowed. She 
pays $135.99 for an antibiotic and $59.69 for prescription eyedrops. 
She is only able to take two other prescriptions her doctor has 
recommended by getting free samples.

Dosage Decreases, But Prices Stay the Same--Mr. S of Yarmouthport, 
Mass., is 87 and married. His annual prescription drug costs are about 
$4,500. Originally, Mr. S's doctor prescribed 10 mg. of one of the 
drugs, which cost $251.99. The dosage was later decreased to 5 mg., but 
the cost remained $251.99 for the prescription.

Prescription Drug Costs Wipe Out Life Savings--Ms. H of Springfield, 
Ill., has prescription drug costs of $4,000 per year. Over a decade, 
this has amounted to $40,000, depleting most of her life savings.

Food Comes Last--Ms. H of Monroe, Ga., is 83 and widowed. Her annual 
prescription drug costs are about $3,400 ($283 per month). Ms. H's 
monthly income is $691 from Social Security. Her daughter, who was born 
with cerebral palsy, lives with her. After paying for utilities (about 
$250 a month) and her prescriptions, Ms. H has only $158 for food and 
other necessities.

Returning to Work Only Way to Pay for Prescription Drugs--Mr. S of 
Medford, Ore., is 71. His prescription drug costs per year are $2,760 
($230 per month). Social Security benefits cover the cost of rent, 
utilities and food, but not prescriptions. He has diabetes, high blood 
pressure and high cholesterol, all of which require medication. His 
savings were depleted by treatments for his wife's ovarian cancer. To 
pay for the drugs they need, Mr. S has gone back to work. ``Our budget 
would be in serious trouble if this old 71-year-old man couldn't put on 
his boots and overalls and go to work every day,'' he says.

    Mr. Marvin. The trips remind the public of how serious the 
drug problems are for seniors and their families, but bus trips 
are not the answer. While there are dozens of people riding the 
bus and going across to Canada, there are literally hundreds of 
others who physically cannot ride a bus to Canada and have even 
greater needs for prescription drugs than those who are 
fortunate enough to be going three.
    Getting drugs through the mail is sketchy at best, thanks 
to the FDA, which always seems to imply that somehow, as we 
have heard this morning, that the Canadians have lesser 
standards than we do. Some diplomacy that represents with our 
Canadian brothers across the border.
    Senator you can help seniors by finding out just what the 
U.S. Customs policy really is. Can we go to Canada and bring 
out a 3-month supply? We do that on the bus and the U.S. 
Customs Service has no problems with our bringing it across, 
but what about getting drugs through the mail? Sometimes they 
come and sometimes they are intercepted by the FDA. We need to 
get some firm information even now as to what the correct 
policy is.
    Our people in Maine are well aware that the Canadian 
government represents its citizens in dealing with the most 
profitable industry in the world. They want to know why the 
American government cannot do the same. Our people in Maine 
know well that the Canadian government bans advertising in 
professional journals, it bans advertising in other than 
professional journals. That's not done in the United States and 
our people want to know why the U.S. Government doesn't 
reinstitute the ban on advertising which contributes heavily to 
the cost of drugs in this country.
    Our people want to know why the government in the name of 
health and safety of its citizens cannot regulate the drug 
industry in the same way that the government is involved with 
regulating the utilities.
    I am proud to be a part of Medicare and the Medicare 
insurance program. But I want to demonstrate for you what's 
wrong with the program. This stool that I brought is a milking 
stool, and I know some of you will be concerned about what 
happens to the milk program, but nonetheless, it represents the 
Medicare program, if you will. This first leg is Part A of the 
Medicare program, it deals with the hospitals. I happen to have 
hepatitis B and through Part A, the tests are taken care of, if 
I wind up in a hospital because of deterioration of the liver, 
it will be taken care of through Part A of the program.
    Part B, this is supposed to be white, if you will, 
represents the heart of the Medicare program providing for 
expenses for the doctors.
    But you will notice that my $750 pill bottle, which is the 
cost that I pay for a 6-month supply to deal with hepatitis B, 
Eupaverin HB, that won't stand on this platform, it falls over.
    There really needs to be a third leg, and I would suggest 
to you that that third leg which is absolutely essential for a 
total Medicare program is a Medicare prescription drug program.
    The ARA, the Alliance for Retired Americans, has some ideas 
on how to approach this issue and how the Congress could make 
positive steps. We are calling for enactment of a new Medicare 
pharmaceutical benefit using the $300 billion reserved in the 
tax cut legislation for an affordable benefit program.
    Congress should consider a change in Medicare sending by 
spending these funds over a 6-year period as opposed to the 
proposed 10-year period. By doing that, we could deepen the 
benefit, make it more affordable for the average income persons 
in the Medicare program, but let's do it and stop debating. 
That's what the seniors I know in Maine and across the country 
are saying.
    Senator this angry old man begs you to do something so that 
I can get out of the bus tour business. Thank you for the 
opportunity.
    [The prepared statement of Mr. Marvin follows:]

           Prepared Statement of John Marvin, Member of the 
                     Alliance for Retired Americans
    Thank you, Senator Dorgan and all of the Members of this 
Subcommittee, for this invitation to testify today. I am John Marvin 
representing the Alliance for Retired Americans where I serve as a 
Regional Board member for the northeastern part of the nation. The 
Alliance, which was established on January 1 of this year, now has 2.6 
million members across the nation. Retirees from affiliates of the AFL-
CIO, community-based organizations and individual seniors have joined 
the Alliance to fight for social and economic justice and civil rights 
for all Americans. I am also representing the Maine Council of Senior 
Citizens.
    I am here today because of my work in Maine and New England to 
organize bus trips to Canada so that seniors can buy prescription drugs 
at much lower prices than are available in the U.S.
    In Maine, we are now organizing our 4th annual trip to Canada which 
is scheduled for September 19-20. On the first trip, I saved $400 on a 
12-month supply of 40 mg. Zocor. I now take Epivirim HB 100 mg. 
instead. While the savings are not nearly as dramatic, I will still pay 
$150 less in Canada than at my local pharmacy. That adds up to about a 
$300 annual savings to me alone.
    On our second trip, we hit the jackpot. We were well aware of the 
festering problems for seniors caused by the price of prescription 
drugs. But Mike Wallace and the 60 Minutes television program which 
featured our trip two years ago escalated awareness of the seriousness 
of the problem by putting a human face on it. In the recent elections, 
it was the rare candidate indeed who did not pledge to do something 
about the problem even if little has been done.
    This work organizing trips and advocating for programs to meet the 
prescription drug needs of seniors puts me in almost daily contact with 
people like Vi Quirion of Waterville, Maine. She retired from a shirt 
factory there and has a very modest retirement income--primarily from 
Social Security. Instead of paying $1290 at her local pharmacy, she 
will pay $660 in Canada for a 6-month supply of Prilosec and Relaten.
    Another couple who will ride with us are Pauline and Leopold 
Nolette of Biddeford, Maine. Between the two of them, they have 
prescriptions for drugs like Anucil, Zocor and Celebrex. Their Canadian 
bill will be right around $1162. Their local pharmacy in Biddeford 
would charge $3,879 for the same drugs, an incredible savings of 
$2,717.
    And we will have on the bus at least one breast cancer patient who 
must take Tamoxifen. A year ago, a month's supply at her pharmacy in 
Augusta was $115. The same quantity cost $15 in St. Stephens, New 
Brunswick, an astounding 79% savings.
    What infuriates Vi Quirion, the Nolettes, myself and all the others 
on the bus is that we are buying these drugs in Canada which are for 
the most part manufactured in the United States of America and shipped 
there.
    Seniors are upset and we have a right to be. Fewer of us have 
access to retiree drug benefits and frequently our incomes exceed that 
which would qualify us for state low-income drug programs. We are asked 
to pay literally the highest price in the world for prescription drugs. 
It is even more insane when you realize that most people with 
substantial incomes in this country have prescription benefits from 
their employers. So seniors wind up paying even more for drugs than do 
the relatively well-to-do. Now that's wrong.
    In Maine we grew impatient with federal inaction. We pushed the 
legislature into passing the Maine Rx program which will ultimately 
result in price controls applied to the products of the most profitable 
industry in this country. Is it unreasonable for U.S. citizens to think 
that we might pay about the same price for prescription drugs as our 
Canadian neighbors?
    PhRMA, Pharmaceutical Research and Manufacturers of America (which 
badly underestimated the citizen power behind this Maine legislative 
initiative), chose to fight the law rather than to see if there is any 
truth to Professor Alan Sager's proposition that lower prices for 
prescription drugs will induce more volume in business so that profits 
should remain constant. However, it will be unlikely that this law--
even with tremendous citizen support--will yield much help for 
consumers for several years.
    Bus trips get a lot of publicity. We filled two buses in less than 
48 hours this year. They highlight the problem. Laws providing for re-
importation are interesting ideas. But neither solves the fundamental 
problem. To begin with, for every person making the trip there are 
others far worse-off physically who need the lower-priced medications 
even more, but they cannot physically board a bus. Ultimately, we want 
our local pharmacies to serve as they are intended--community sources 
of affordable drugs.
    This hearing to review the cost of pharmaceuticals in this country 
in contrast with prices in Canada is right on point. The more 
information that hearings like this provide to the Congress and to the 
public, the closer we will come to agreement on what can and should be 
done. For the Alliance, and I think that I can speak for most seniors 
in Maine and across the northeastern part of this country, the reasons 
for these contrasts in price are clear.
    Why are prices better in Canada? Well in part, Canadians have a 
national health care system and people of all ages obtain a more 
comprehensive system of health care beginning in childhood and 
continuing into their older years. Only about 10% of Canadian seniors 
do not have either public or private coverage for drugs while up to 
half of U.S. seniors lack coverage during some time of the year. Only 
about 4% of Canadian seniors pay more than $100 in out-of-pocket costs 
for drugs per month while 20% of U.S. seniors do.
    More important, Canadians pay less for drugs because their 
government bargains on their behalf with the pharmaceutical industry. 
Their drug prices are cheaper because the Canadian government believes, 
as should this government, that the role and impact of pharmaceuticals 
in people's lives are too important to leave to market forces. On 
behalf of the Canadian people, their government forces the 
pharmaceutical industry to bargain and to peg prices close to the 
average prices of pharmaceuticals in other industrial nations or face a 
denial of opportunities to market the drug in Canada. We should take 
the same direction on behalf of all U.S. citizens needing medications.
    We are also forced to go to Canada to purchase lower cost drugs 
because of the lack of a pharmaceutical benefit within the Medicare 
program.
    I, and the Alliance for Retired Americans, have some ideas on how 
to approach this issue and how the Congress could take positive steps. 
The Alliance for Retired Americans is calling for the enactment of a 
new Medicare defined pharmaceutical benefit using the $300 billion 
reserved in the tax cut legislation for an affordable benefit. Congress 
should consider a change in Medicare by spending these funds over a 
shorter period of time than 10 years. By doing that, we can deepen the 
benefit and make it more affordable for average income persons in the 
Medicare program. But let's do it and stop debating--that is what the 
seniors I know in Maine and across the country are saying.
    To emphasize the contrast between Canadian and U.S. prescription 
drug prices, members of the Alliance for Retired Americans will board 
buses later this month and travel to Canada from every State that 
borders our northern neighbor to have their prescriptions filled. We 
hope to show that seniors can save hundreds of thousands of dollars in 
just one week of short trips. But, we also want to demonstrate the 
absurdity of having U.S. Citizens go to Canada to get the savings. Your 
enactment of an affordable, comprehensive Medicare drug benefit will 
end these burdensome trips north and end this national embarrassment.
    The major reason that prices are so high in the U.S. is that the 
pharmaceutical industry has a lock on the supply of needed drugs backed 
up by law and power. It controls the development process for new drugs 
both here and throughout the world. The laws of this nation then 
protect the market power of the industry by providing patent protection 
for almost two decades. To make sure this patent protection stays 
secure, together with public financing of the highest risks in the 
development process, the industry spends hundreds of millions of 
dollars to influence government at all levels. The result is the 
exploitative pricing policies that we are discussing here today.
    The inaugural publication of the Alliance, The Profit in Pills: A 
Primer on Prescription Drug Prices, documents why prescription drug 
prices have increased so dramatically and the various ways that the 
pharmaceutical industry protects its interests at the expense of the 
American public. Most affected are older persons and those with 
disabilities who take more medications than other segments of the 
population and are the mostly likely to pay full retail prices. I 
respectfully request that this report be included in the hearing 
record. I would also ask that you, Senator Dorgan, put it into the 
Congressional Record so that all of your colleagues may read it.
    As I mentioned earlier, some states, like Maine, have become 
frustrated by the lack of action here in Washington. They are trying to 
take steps on behalf of their own citizens to curb prices. But, they 
are being fought all of the way by the industry in the courts and in 
the press. We support state action to push prices down but this is a 
national policy problem. Most states cannot take on a global industry 
that so vigorously holds on to its privileged economic position. The 
industry has spent millions of dollars lobbying against a Medicare drug 
benefit because they believe that such a benefit may cut into their 
profit margins and lead to greater public regulation of their industry.
    Why is it that the Federal Government is so vigorous in bargaining 
with all parts of the health industry to set prices but not with the 
pharmaceutical industry? Why does the Department of Health and Human 
Services force hospitals and doctors and other health providers to take 
lower payments or compete for government business but not force the 
same constraints on the prices we pay for out-patient pharmaceuticals? 
There is something wrong with the process and millions of citizens--
older people and persons with disabilities--are paying the price for 
government's timidity. It's got to end.
    In short, we don't have the luxury of time to wait while nothing 
happens. Thousands of us face continued deterioration of our health, 
loss of savings, increased burdens on our families, unnecessary 
institutionalizations, and, yes death, while the pharmaceutical 
industry seems to be able to stop Congress from acting. Please--listen 
to our plea.
    I, for one, want to get out of the tour bus business.
    Thank you.

    Senator Dorgan. Mr. Marvin, thank you very much for your 
testimony.
    Ms. Marjorie Powell represents the Assistant General 
Counsel of the Pharmaceutical Research and Manufacturers of 
America, and I imagine you are really excited to follow Mr. 
Marvin, but why don't you proceed? We are glad you are here.

  STATEMENT OF MARJORIE E. POWELL, ASSISTANT GENERAL COUNSEL, 
      PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA

    Ms. Powell. Thank you, Senator Dorgan. My name is Marjorie 
Powell, I am the Assistant General Counsel of the 
Pharmaceutical Research and Manufacturers of America, PhRMA, 
and I represent the companies who discover and develop and 
secure FDA approval to market the innovative drugs.
    I actually am quite pleased to follow Mr. Marvin this 
morning because he did a much more effective job than I could 
of illustrating what we believe is the primary source of the 
problem and the primary reason why this hearing is being held, 
which is that seniors do need access to prescription 
medications. They have access to health care through the 
existing Medicare system, but if anybody designed Medicare 
today, they would definitely include a prescription drug 
benefit, because drugs are the most cost effective, beneficial 
portion of the health care system and we would urge this 
Committee and Members of Congress to enact a Medicare drug 
benefit.
    We think that the issue of importing drugs from Canada or 
from any other country has come up in part because of the 
political debate about the need for and how to structure a 
Medicare drug benefit.
    When you look at prescription drug costs within Canada and 
the U.S., you do need to look at the context within which 
prescription drugs are provided in Canada. They are part of a 
government-run health care system where the government imposes 
price controls on drugs, hospital services, physician services, 
medical specialist services. Those restrictions result in 
shortages of not only physician services and specialist 
services, access to a variety of medical care treatments, but 
also restrictions on drugs. These restrictions have an effect 
on the health care of people in Canada.
    A recent study found that 20 percent of the physicians in 
British Columbia said that they had admitted patients to either 
emergency rooms or hospitals because those patients had been 
switched from one drug to another because of the restrictive 
system in British Columbia on the cost and availability of 
drugs.
    The price controls don't actually have the effect of 
lowering the proportion of health care expenditures for drugs. 
A study found, in 2000, 15.5 percent of Canadian health care 
expenditures went for prescription drugs. In the United States, 
in the same year, 2000, approximately 8.6 percent of health 
care dollars were spent on prescription drugs.
    There are a variety of reasons why some drugs are less 
expensive in Canada. One of those reasons is that it takes a 
longer time to get new drugs approved to go on the market in 
Canada today. It takes anywhere from one to 2 years longer in 
Canada than in the United States. We used to, back when I first 
became involved with this industry, talk about an FDA drug lag, 
and because of at least two actions by Members of Congress, and 
because of FDA monitoring this issue, there is no longer a drug 
lag between the United States and Canada, or the United States 
and a variety of other countries.
    And those two Congressional actions, Senator, are the 
Prescription Drug User Fee Act of 1992, allowing the FDA to 
hire additional reviewers, and the FDA Modernization Act of 
1997.
    Let me talk for about a minute about the approval process 
in Canada. There is in Canada a review of drug safety and 
effectiveness just like there is here. Once the Canadian 
authorities have approved a drug for marketing, however, that 
drug must go through two additional steps that do not occur in 
the United States.
    First they must go to the PMPRB, the Prescription Medicines 
Price Review Board, which is a national board that decides on 
the maximum price that a manufacturer can charge to 
wholesalers. Once that happens, and that can take anywhere from 
2 weeks to 2 years, then the manufacturer must go province by 
province and determine a price that the province will reimburse 
for that drug, if the province will reimburse for that drug at 
all.
    Back in the period from December 1997 to November 1999, 
Health Canada approved 134 new drugs. During that same period, 
Manitoba authorized 36 of those drugs to be on the Manitoba 
formulary.
    Quebec, which was the most generous of the various 
provincial plans, approved 64 of them. So more than half of 
those products are not available to people in Canada or to U.S. 
citizens going to Canada today attempting to purchase drugs.
    There have been a number of studies of price differences 
between the United States and Canada, and most of the studies 
are seriously flawed because of selection of products to be 
sampled, comparisons of retail prices in the United States and 
wholesale prices in Canada, ignoring discounts given to large 
U.S. purchasers, such as insurers, HMOs or PBMs, changes in 
value of the U.S. dollar.
    But, I come back to my starting point, that the issue of 
seniors having to take buses to Canada is an issue of seniors 
having coverage for prescription drugs just as they have 
coverage for hospital expenditures, and we have been urging 
Members of Congress to enact a Medicare drug reform benefit. 
Thank you.
    [The prepared statement of Ms. Powell follows:]

 Prepared Statement of Marjorie E. Powell, Assistant General Counsel, 
          Pharmaceutical Research and Manufacturers of America
Mr. Chairman and Members of the Subcommittee:

    On behalf of the Pharmaceutical Research and Manufacturers of 
America (PhRMA), I want to thank you for providing the opportunity to 
testify on pharmaceutical price differences between the United States 
and Canada.
    As part of the Medicare reform debate, the cost of some drugs for 
American seniors and price differences between Canada and the U.S. have 
attracted the attention of U.S. legislators and the media. Before I 
address these two topics, however, I think it is important to briefly 
discuss in a general way the Canadian health-care system. Members of 
Congress should be aware of the Canadian experience with health-care 
cost-containment policies for pharmaceuticals and other health-care 
services when considering changes to the U.S. health-care system.
    The unintended, adverse consequences of government-driven cost-
containment policies on access to appropriate medical and 
pharmaceutical care are not widely known. However, the results of such 
government intervention have been widely felt by patients. With respect 
to pharmaceuticals, cost-containment and price-control mechanisms have 
led to less choice and delays in access to the newest and most 
innovative medicines. In addition, these policies have also led to 
increases in other forms of more costly health care, such as 
hospitalization.
Canadian Health-Care System
    Health care in Canada is administered through the Ministry of 
Health in each of the Canadian provinces and territories. The Canadian 
system is primarily publicly financed through taxes collected at the 
federal and provincial levels to provide coverage for hospital and 
physician services. Although often portrayed as ``comprehensive 
coverage,'' Canadian health care is not truly comprehensive in that 
provinces are obligated to finance only ``medically necessary'' 
hospital and physician services. Since neither the federal government 
nor any of the provinces has defined ``medically necessary,'' this term 
has often been inconsistently interpreted.
    An outpatient pharmaceutical benefit is also not nationally 
mandated. All provinces do provide coverage for seniors and low-income 
residents and four provinces have instituted universal coverage for all 
age groups and utilize cost-sharing arrangements such as significant 
co-payments and/or deductibles.\1\ The majority of provinces, including 
Ontario, provide drug coverage only for seniors and low-income 
residents. Therefore, 56 percent of Canadians live without universal 
prescription-drug coverage. These individuals often receive 
pharmaceutical coverage through employers, unions, or private insurers.
---------------------------------------------------------------------------
    \1\ The Canadian Pharmacists Association, Provincial Drug Benefit 
Programs, 1999, (21st Edition).
---------------------------------------------------------------------------
    In order to control rising health-care costs, Canada over time has 
implemented a number of cost-containment measures. Unlike the U.S., 
which has a market-based system, the Canadian system has controlled 
costs by relying on government financing and price-control mechanisms.
    In response to dwindling federal funds, provinces have cut spending 
on health-care services through de-listing or de-insuring ancillary 
services, like home health care, and increasing cost-sharing for 
pharmaceutical services. Although successful in reducing the rate of 
increase in health-care costs, the impact on patients has not been 
positive. For example, according to the Fraser Institute, a leading 
Canadian think tank, over 200,000 Canadians are waiting for surgical 
procedures.\2\ In 1998, the average Canadian patient needing care 
waited:
---------------------------------------------------------------------------
    \2\ Michael Walker and Martin Zelder, Critical Issues Bulletin: 
Waiting Your Turn, The Fraser Institute (Vancouver), 1999.

   13.3 weeks for treatment from a specialist (6 weeks to see a 
---------------------------------------------------------------------------
        specialist, and nearly 7.3 more weeks to receive treatment);

   11.4 weeks for an MRI scan;

   25.4 weeks for orthopedic surgery, and

   About twice as long as is considered ``clinically 
        reasonable'' for radiation for cancer and internal medicine.\3\
---------------------------------------------------------------------------
    \3\ Id.

    A December 1999 Washington Post article described the Canadian 
health system as ``on the critical list, overwhelmed, and under 
attack.'' For example, ``[In] Ontario, the waiting list for MRIs is so 
long that one Ontario resident booked himself into a private veterinary 
clinic that happened to have one of the machines, listing himself as 
`Fido.' ''\4\ Wait times for prostate cancer patients became so long 
that a patient group actually formed the Society of those Awaiting 
Cancer Therapy, according to The Wall Street Journal.
---------------------------------------------------------------------------
    \4\ S. Pearlstein, ``Health Care on the Critical List: Canada's 
Public System is Overwhelmed, and Under Attack,'' The Washington Post, 
December 18, 1999, p. A20.
---------------------------------------------------------------------------
    Clearly, public dissatisfaction with health-care services in Canada 
is high and on the rise. Recent polls show that 78 percent of Canadians 
now say that their health care system is in crisis.\5\ In a poll taken 
in December 1999 by Ekos Research Associates, 93 percent of the 3,000 
Canadians interviewed reported that improving health care should be the 
federal government's top priority.
---------------------------------------------------------------------------
    \5\ Angus Reid Group, Inc., February 2000.
---------------------------------------------------------------------------
Drug Pricing in Canada
    In sharp contrast to the U.S. where pharmaceutical prices are 
largely determined by market forces, drug pricing in Canada is 
regulated by two separate governmental bodies. Canada's Patented 
Medicine Prices Review Board (PMPRB) is a federal government board that 
sets the maximum prices for innovative, patented medicines in Canada.
    Prior to product launch, a manufacturer can either have discussion 
with pricing-board officials and submit cost-benefit information used 
to assist the company in determining its price, or make a formal 
request for an Advanced Ruling Certificate (ARC) for pricing, which 
occurs only rarely.
    If a manufacturer has not received pre-approval for a price for a 
new product from the PMPRB, the price charged by the manufacturer must 
be submitted to the Canadian government pricing board within 60 days 
after introduction so that it can rule whether the manufacturer price 
is excessive. If the price of the medicine is deemed excessive by the 
Canadian government pricing board, manufacturers have two options:

   Make a Voluntary Compliance Undertaking (VCU). A VCU is an 
        agreement by the manufacturer with the PMPRB to reimburse the 
        government for the difference between the price it had been 
        charging and the price set by the PMPRB, and to accept the 
        maximum price set by the pricing board rather than take the 
        dispute further. This, however, does not mean that a 
        manufacturer agrees that the price it established was 
        excessive.

   Appeal for Consideration. If no agreement on a maximum price 
        is reached with an appeal, the manufacturer can either agree to 
        reduce the price and reimburse the government for differential 
        revenues or it can appeal in the courts.

    Ultimately, if there is no agreement on the maximum price a 
manufacturer can charge for a product, the Canadian government can:

   Impose a fine on the manufacturer equal to twice the amount 
        of difference between the price actually charged and the 
        government-controlled price;

   Annul the manufacturer's patent, and

   License the product to another pharmaceutical manufacturer.

    In addition, if the government believes that a manufacturer 
knowingly sets the price of a product in excess of the Canadian 
government pricing board's maximum price, the manufacturer can be 
charged with a criminal offense. Not only must the price differential 
be reimbursed, but monetary penalties and jail terms are possible.
    Maximum prices are determined by the Canadian government pricing 
board. The PMPRB uses several ``tests'' in controlling the prices of 
innovative medicines:

   The Reasonable Relationship Test is designed to ensure that 
        the prices of different dosages or formulations of the same 
        medicine are reasonably related.

   The Therapeutic Class Comparison Test compares the new 
        medicine to other medicines in the same therapeutic class and 
        sold in the same markets to ensure that prices are reasonably 
        related.

   The International Price Comparison Test compares the average 
        transaction price in Canada with prices in other price-
        controlled countries.

   The CPI Adjusted Price measures changes in the price of a 
        medicine over time. It is designed to ensure that the price 
        does not rise more quickly than CPI.

    The Canadian government pricing board also establishes classes of 
new patented medicines for which price reviews are conducted.
    Once the maximum price has been set by the PMPRB, the second tier 
of price regulation occurs at the provincial level. Provincial 
governments have separate health-care systems and drug-benefit programs 
that further restrict access to both care and drugs.
    For example, Ontario, the province with the largest number of 
beneficiaries in its health-care system, has historically had one of 
the most restrictive formularies in Canada. From 1990 to 1997, Ontario 
only gave 35 new, innovative medicines full listings. From December 
1996 to November 1997, this low rate of listing continued--Ontario gave 
full formulary listings to only 13 of the 80 innovative medicines 
introduced in Canada.
    This double layer of price controls, along with restrictive 
provincial formularies, makes it difficult for Canadians to have access 
to and coverage for new, innovative, life-saving medicines.
How Canada's Drug Pricing System Affects Public Health
    Cost-containment mechanisms have had a negative effect on access to 
pharmaceuticals and overall public health. For example, 27 percent of 
the physicians in British Columbia reported that they had to admit 
patients to the emergency room or the hospital as a result of mandated 
medicine switching.\6\ Confusion or uncertainty by cardiovascular or 
hypertension patients due to mandated medicine switching was reported 
by 68 percent of doctors, while 60 percent observed worsening or 
accelerating symptoms.\7\ British Columbia doctors reported similar 
problems, with the end result being an increase in patients who stopped 
taking their medications, which led to increased emergency-room 
visits.\8\
---------------------------------------------------------------------------
    \6\ Dr. Bill McArthur, Think Tank Warns Clintonization is 
Candianization of Health Care, The Fraser Institute, January 27, 2000.
    \7\ Id.
    \8\ Id.
---------------------------------------------------------------------------
    As compared to the U.S., Canadians experience longer delays in both 
access to and reimbursement for new pharmaceuticals due to:

   Delays in market approval dates.

   Delays in coverage until formulary decisions are made.

   Restrictions in product reimbursement because of restrictive 
        formularies, reference-pricing schemes, and patient cost-
        sharing.\9\
---------------------------------------------------------------------------
    \9\ The Lewin Group, The Impact of the Canadian System on Access to 
New Medical Technology Including Prescription Drugs, March 7, 2000.
---------------------------------------------------------------------------
Delays in Market Approval Dates
    Although regulatory review times for new products have decreased 
over the past several years, the Canadian regulatory process has 
consistently taken 1.5 times as long as the U.S. system for drug review 
and approval.\10\ For example, in 1998 the FDA approved new drugs in an 
average of 365 days, while the Canadian Therapeutic Products Programme 
(TPP) took an average of 570 days.\11\
---------------------------------------------------------------------------
    \10\ Id.
    \11\ Id.
---------------------------------------------------------------------------
Postponing Coverage Until Formulary Decisions are Made
    The delays continue at the provincial level where various 
government ``gatekeepers'' review the ``therapeutic value'' of 
prescription drugs before they are included in the formulary. In the 
U.S., most health plans will cover new products either with no 
restrictions or through prior authorization until a formulary decision 
is made. In Canada, new products are not publicly reimbursed until 
formulary listing has been completed. Formulary access rates at six 
months post-product approval in Canada ranged from 51 percent in Quebec 
to less than 10 percent in Alberta, British Columbia, and Ontario. 
Eighteen months following new product approval, formulary access rates 
in Ontario, the province containing almost 40 percent of Canada's 
population, were still only 23 percent.
Restriction in Product Reimbursement
    Canadian provinces limit product reimbursement based on formulary 
restrictions, referenced-based pricing, and patient cost-sharing. 
Although these cost-containment mechanisms have lowered utilization of 
prescription drugs by seniors and low-income adults, emergency-room 
visits and the use of other medical services increased.
    For example, in the first 10 months following increased patient 
cost sharing in Quebec, savings of $17 million (Canadian dollars) were 
achieved for income security recipients who regularly took drugs for 
chronic diseases. However, due to the new cost-sharing structure, 
recipients financed one-third of the savings. Drug savings were all 
offset by a $4.1 million increase in other health-care 
expenditures.\12\ In another example, British Columbia will only 
reimburse for two arthritic drugs as first-line therapy. Three 
commonly-used anti-arthritic drugs in the U.S. are not covered under 
any circumstances.
---------------------------------------------------------------------------
    \12\ Id.
---------------------------------------------------------------------------
U.S.-Canadian Price Differences 
    Many have asked why drug prices are sometimes higher in the U.S. 
than in Canada. The answer is based on many variables. However, the 
main reason is that in the U.S. each individual company is generally 
able to price its own medications based on normal market factors, such 
as supply, demand, quality, value, and cost-effectiveness.
    The prices set for medicines reflect the cost of drug development, 
not only for drugs that make it to the market, but also for those that 
do not. In 2001 alone, the pharmaceutical industry is expected to 
invest $30.5 billion in drug research and development. Estimates by the 
Boston Consulting Group indicate that the pre-tax cost of developing a 
medicine introduced in 1990 was $500 million.\13\ And just because a 
drug makes it to market does not mean it is a commercial success. A 
1994 study conducted by economists at Duke University found that only 
three out of every 10 drug products, or new chemical entities, 
introduced from 1980 to 1984 had returns higher than average after-tax 
R&D costs.\14\
---------------------------------------------------------------------------
    \13\ The Boston Consulting Group analysis based on J.A. DiMasi et 
al. (1991) as quoted by the Office of Technology Assessment in 
Pharmaceutical R&D: Costs, Risks, and Rewards, February 1993.
    \14\ Henry J. Grabowski and John M. Vernon, ``Returns to R&D on New 
Drug Introductions in the 1980's,'' Journal of Health Economics 13 
(1994) 338-406.
---------------------------------------------------------------------------
    The prices also need to generate revenues that meet investors' 
expectations to continue to attract private investment. Investors seek 
to be compensated for their investment commensurate with risk; drug 
discovery and development are high-risk and require substantial funds 
over many years before medicines may reach the market.
    In Canada, each company is denied the freedom to set prices for its 
own innovative prescription medicines. Prices are controlled by the 
Canadian government. The only choice a manufacturer has is to sell at 
the price set by the Canadian government--or not to sell its product. 
If a manufacturer opts not to sell its product, the government is 
allowed to authorize a Canadian company to copy and sell the drug, even 
without the patent holder's permission. In other words, if a 
manufacturer does not sell at a price Canada allows, the government 
effectively expropriates the value of the patent; the patent holder 
receives only royalties, which historically have been only 4-5 percent.
    Outside the United States, most countries choose to interfere in 
the market and set limits or controls on pharmaceutical prices, 
particularly for new, innovative products, to control health-care 
expenditures. Unfortunately, these practices have not worked. As a part 
of Canada's total health-care spending in 2000, total expenditures on 
drugs at the retail level, excluding drugs prescribed for use in 
hospital settings, have increased faster than other major components of 
health care, and reached a forecast level of 15.5 percent of total 
health-care expenditures.\15\ In contrast, in the United States, 
outpatient prescription drugs as a percentage of U.S. National Health 
Expenditures was estimated to be 8.6 percent for 2000.\16\
---------------------------------------------------------------------------
    \15\ See the National Health Expenditure Trends, 1975-2000, 
published by the Canadian Institute for Health Information (CIHI), 
2000.
    \16\ Health Care Financing Administration, OACT, 2001.
---------------------------------------------------------------------------
    In addition to the use by Canada of price controls on prescription 
drugs, there are other reasons why prices for prescription drugs differ 
in the U.S. and Canada. Prices vary from country to country for a host 
of reasons, including living standards, income differences, willingness 
to pay, differences in medical practice, product volume, exchange 
rates, the level of competitive medical service or product prices, 
patent term and expiration dates, the length of time and costs of drug-
marketing approval, as well as government-imposed reimbursement and 
price controls.
    Another common reason that price differences exist between the U.S. 
and Canada and the U.S. is product liability. Questions of whether to 
sue, the nature of the forum, the level of proof needed to prevail, the 
nature or size of the case, and the level of damages awarded often make 
product-liability cases in the U.S. more costly to pharmaceutical 
manufacturers than in other countries, particularly in Canada.
    A study released in December 2000 by the U.S. International Trade 
Office (ITC) explored foreign markets and U.S. prices, pharmaceutical 
development and approval processes in various countries, and how prices 
are established within countries. The report also considered how to 
measure the differences in prices between countries and concluded, ``A 
single, definitive, unbiased measure of comprehensive price differences 
does not exist.'' \17\
---------------------------------------------------------------------------
    \17\ ``Pricing of Prescription Drugs,'' United States International 
Trade Commission, Investigation No. 332-419, Publication 3333, December 
2000.
---------------------------------------------------------------------------
Most Cross-National Price Comparisons are Flawed
    Recently, snapshot cross-border comparisons of pharmaceutical 
prices have gained great popularity as ``demonstrating'' that prices 
charged in the U.S. are higher than those charged abroad. Like any 
still frame out of a movie, these snapshots often mislead and fail to 
tell the whole story.
    The ITC report examined several studies relating to pricing and 
determined that there are methodological flaws with each. Sample 
selection issues biased comparisons and ``severely limit the generality 
of the conclusions of this research.'' The report also identifies the 
replacement cost benefit that pharmaceuticals can play in overall 
health care, stating, ``At times, pharmaceutical products are used 
instead of costlier options such as hospitalizations.'' \18\
---------------------------------------------------------------------------
    \18\ Id.
---------------------------------------------------------------------------
    Virtually all of the cross-border ``studies'' comparing drug prices 
have been flawed by faulty methodology. Professor Patricia Danzon of 
the Wharton School, and Fredrik Andersson and colleagues at the 
Battelle Medical Technology and Policy Research Center, have published 
extensively on the shortcomings of different approaches for comparing 
drug prices internationally. They conclude that international price 
comparisons are misleading and generally based on flawed methodologies, 
and suggest that public policy is all too often influenced by price 
studies without an understanding of their technical limitations.\19\
---------------------------------------------------------------------------
    \19\ See e.g. Danzon, P., Pharmaceutical Price Regulation: National 
Policies versus Global Interests, (AEI Press: Washington, DC, 1997).
---------------------------------------------------------------------------
    One of the most common flaws of many price comparisons is comparing 
manufacturers' list prices for drugs in the U.S. with list prices in 
other countries. This practice leads to erroneous conclusions because 
the actual transaction price in the U.S. is often significantly lower 
than the list price, unlike in many other countries.
    Another common flaw is that price comparisons are also typically 
made on the basis of simple averages of the top-selling drugs in a 
given country for which matching products are available in other 
countries. This often results in the use of extremely small samples. 
The studies also typically make no attempt to include the most 
frequently used drugs in comparison countries, nor do they attempt to 
weigh the prices based on the consumption of drugs in countries 
examined.
    Yet another flaw in many comparisons is that the sampled drugs are 
not always directly comparable. Differences in package size, dosage 
forms, strengths, indications, and dispensing methods need to be taken 
into account, but rarely are. In short, apples-to-apples comparisons 
are rare, so reported results must be viewed with care.
    Converting foreign prices to local prices for comparison purposes 
produces another type of error, given that changes in exchange rates 
over time create considerable variability in price relationships.
    This problem is further exacerbated by foreign government price 
setting. When faced with a devaluation, U.S. exporters of most products 
try to raise their price in local currency to keep constant in U.S. 
dollars. This is evident to anyone visiting a local bookstore. A $25 
book in the U.S. is actually priced on the jacket at Canadian $33. 
Newspapers costing $1.50 in the U.S. are listed at Canadian $2. But 
with pharmaceuticals, the price ceiling imposed in Canada by the 
PMPRB--totally disconnected from exchange rates--has no mechanism that 
allows U.S. exporters of medicines to adjust their prices in Canada due 
to exchange-rate fluctuations.
    Many studies have focused on the final prices to patients or third 
parties rather than revenue received by the manufacturers. However, in 
most countries, pharmaceutical wholesalers and retail pharmacies are 
reimbursed at fixed percentage mark-ups over the ex-manufacturer price. 
The margins are set by law and differ substantially from one country to 
another. Many countries also impose a value-added tax. Even if a 
manufacturer were to set a uniform wholesale price in all 
industrialized countries, the final retail price to consumers would 
vary by as much as 90 percent due to these mark-ups. If a manufacturer 
sold a product for $1.00 in North American and European markets, the 
final price to a consumer would range from a low of $1.14 in the UK to 
a high of $2.08 in Finland. The U.S. price would be $1.43. Only the UK 
and Sweden would have a consumer price lower than that available to 
U.S. consumers.
    There are numerous ways in which ``simple'' cross-border 
comparisons result in inaccurate conclusions. While these problems may 
be well known in academia, they are often missing from the public 
debate. On top of all of the technical problems discussed above, it is 
also important to remember that for U.S., non-government purchases, 
market forces set the price. In other countries, like Canada, 
governments, directly or indirectly, set the price and no government 
bureaucracy has ever been able to mimic a market-based price for a 
large number of products on a sustainable basis.
Many Products, Not Just Prescription Drugs, Are Less Expensive in 
        Canada
    Many products, not just prescription medicines, are generally less 
expensive in Canada than in the United States. This is because the 
Canadian government imposes price controls and unnecessary regulations 
on many industries. The Canadian government runs marketing boards for 
most industries. The boards operate within a specific province or 
throughout the entire country. For example, one such board is the Wheat 
Board. As Chairman Dorgan is keenly aware, the Wheat Board in Canada 
monitors and sets prices on the sale of wheat in Canada. Therefore, the 
cost of wheat products, such as bread, are directly related to the 
price dictated by the Wheat Board.
Reimportation of Pharmaceutical Products into the U.S.
    Although some seniors in the U.S. are traveling to countries like 
Canada or using foreign-based web sites in search of less expensive 
pharmaceuticals, they may be putting their health at risk by doing so. 
Government investigation into the reimportation of pharmaceuticals has 
shown that it opens our nation's borders to counterfeit medicines and 
places vulnerable populations at risk. Reimportation proposals are a 
distraction to the real solution--a Medicare prescription drug benefit.
Conclusion
    In conclusion, although pharmaceutical prices in Canada are 
sometimes less than what they are in the U.S., it is important to 
remember why this is so. As discussed above, there are many reasons for 
price differences between countries. But the primary reason is 
government-mandated price controls. In Canada, this has meant limited 
choice and access to the newest and most innovative medicines. It has 
also meant lengthy delays for other health-care treatments and less 
access to medical technology. So although government-imposed price 
controls can appear as an attractive choice, they hurt the very people 
they are designed to help--patients.
    We should learn from Canada's mistakes--not import them. Nor should 
we make the mistake of adopting a risky and dangerous reimportation 
scheme instead of addressing the underlying problem by reforming the 
Medicare program, including enacting a prescription-drug benefit.
    That concludes my formal presentation. I will be pleased to answer 
any questions that the Chairman or Members of the Subcommittee may 
have.

    Senator Dorgan. Ms. Powell, thank you very much.
    Next we will hear from Stephen Giroux, Community 
Pharmacist, Middleport Family Health Center in Middleport, New 
York, and Member of the National Community Pharmacists 
Association. Mr. Giroux, thank you for being here.

     STATEMENT OF STEPHEN L. GIROUX, COMMUNITY PHARMACIST, 
    MIDDLEPORT FAMILY HEALTH CARE CENTER, AND MEMBER OF THE 
NATIONAL COMMUNITY PHARMACISTS ASSOCIATION, ACCOMPANIED BY JOHN 
  M. RECTOR, SENIOR VICE PRESIDENT FOR GOVERNMENT AFFAIRS AND 
                    GENERAL COUNSEL TO NCPA

    Mr. Giroux. Thank you, Senator, I am pleased to be here, 
and I might add that I come from western New York, Niagara 
County, home of Niagara Falls, and it is a small community not 
unlike those in North Dakota that you have described several 
times. When someone knows I am from New York, they have a 
little bit different picture than where I am actually from. I 
have heard you tell that story and I related very closely to it 
because my little village in Middleport has about 1,800 
residents, so it's a similar size community.
    Senator Dorgan. That is a big town.
    Mr. Giroux. Also, in addition to being an actively 
practicing community pharmacist and owning three community 
pharmacies as well as a home medical equipment business, I am 
the past president and current board member of the board of 
directors of the Rochester Drug Co-Op, which is a regional drug 
wholesaler that sells about $300 million worth of 
pharmaceuticals and we do business in New York and 
Pennsylvania. I am also a past president and board member of 
the Medina Memorial Health System, a nonprofit hospital which 
buys products far lower than I can as a retailer, even though I 
do a lot more business than the hospital does. And I am pleased 
to serve on the executive committee of the National Community 
Pharmacists Association, formerly known as the National 
Association of Retail Druggists. I am accompanied today by John 
Rector, Senior Vice President for Government Affairs and 
General Counsel to NCPA.
    I thank you, Senator, for having this hearing today, and 
these are very very crucial issues, both to consumers and to 
small businesses.
    NCPA, the National Community Pharmacists Association, 
represents more than 25,000 independent pharmacies where over 
75,000 pharmacists dispense more than 50 percent of the 
nation's prescription drugs and related services. Independent 
pharmacists serve 18 million people daily. NCPA has long been 
acknowledged as the sole advocate for this vital component of 
the free enterprise system, and for decades has been the only 
national pharmacy association with universal state association 
membership, including those of the committee members.
    Our members function in the market in a variety of forms. 
We do business as single stores ranging from small apothecaries 
to full line high volume pharmacies; as independent chains, 
sometimes ranging as large as a hundred locations; also as 
franchises, such as NCPA members involved with the Medicine 
Shop franchise. Whatever form of business entity, however, 
independent pharmacists are the decisionmakers for this wide 
variety of NCPA members companies. As owners and managers and 
employees of independent pharmacies, our members are committed 
to legislative and regulatory initiatives designed to protect 
the public and to provide them a level playing field with a 
fair chance to compete.
    We appreciate the opportunity to assist the Committee in 
assessing the differences between American and Canadian 
pharmaceutical prices, and how these prices affect the American 
consumer, and means to bring American prices in line with 
Canadian prices.
    In May 1999 we endorsed a bipartisan International 
Prescription Drug Parity Act by Representatives Marion Berry, 
Bernard Sanders and Jo Ann Emerson, and S. 1191, sponsored by 
you, as well as Senator Wellstone, Olympia Snowe, and Tim 
Johnson. We work closely with you, Senator, and Senator 
Jeffords, and House and Senate allies in this important and 
crucial legislation.
    With the exception of the sunset provision, that 
legislation was nearly identical to the language that was 
overwhelmingly approved by the U.S. Senate, and we have 
examples of that in the packet.
    Our business, my own business is located about 40 miles 
from the Canadian border. Never a day goes by that in the 
course of my practice of pharmacy that I don't have a 
conversation with a patient or a patient's family member that 
is concerned with the astronomically high costs of prescription 
drugs.
    And, at the outset, I must say that we do need a Medicare 
prescription drug benefit for our nation's elderly, not some 
scam like President Bush's cash discount card that gives 
absolutely no benefit to our seniors by picking PBM's as market 
favorites, creating an anticompetitive environment that will 
severely harm the small businesses that we represent. In any 
case, we need to get some relief from the high cost of 
prescription drugs for the elderly and the uninsured.
    This legislation provides an excellent free market safe 
approach to allow our patients access to safe and lower priced 
FDA-approved prescription drugs without bypassing established 
distribution channels or the important professional services of 
a pharmacist. After all, it is the pharmacist who has the well 
established trust relationship with patients.
    As our President John Carson observed last May, we are 
deeply disappointed that President Bush reconsidered his 
announced support for this new law and the resulting delay by 
HHS Secretary Thompson and his failure to implement this bill.
    Our house of delegates unanimously approved a resolution 
last year calling for the expeditious implementation of this 
new law. Today we reiterate our views.
    The nation's retail pharmacists operate in an extremely 
competitive marketplace on razor thin margins averaging less 
than 3 percent. My drug wholesaler mark-ups are even slimmer. 
My wholesaler will use an alternative vendor supplier for 
pharmaceuticals for a savings of as little as 1 to 2 percent. 
We will move our market share to an alternate vendor supplier.
    If we are afforded, through the implementation of this 
legislation, the opportunity to import or reimport safe FDA-
approved drugs for a 40 to 60 percent savings, we will do that 
in a heart beat, and these savings will be shared with our 
members who will pass those savings along to the patients that 
we serve. The competitive nature of our marketplace demands 
that.
    Importation can be achieved safely and cost effectively by 
our small regional wholesalers and our buying groups through 
existing distribution channels. The large wholesalers and chain 
pharmacy corporations are potentially opposed to this 
implementation, which would not require any authorized 
purchaser, not require, but it would be voluntarily to do this 
reimportation. Perhaps these companies that oppose that, 
already operate in an international marketplace and do not want 
to give up their competitive advantage.
    This current law, we do not want to allow the bypassing of 
the valuable counsel that's available from the trusted 
relationship with the community pharmacist. We do want to give 
access to the benefits of lower global pricing to American 
consumers.
    The Bush Administration is denying American consumers, 
especially the elderly and the uninsured, equal access to the 
benefit of global prescription drug pricing. This legislation 
takes this opportunity to do it in a--to allow these 
pharmacists and their consumers this access in a free market 
and nonbureaucratic way.
    I have taken the opportunity to bring eight examples, not 
any duplicates of those that you brought, Senator, of Canadian 
products and their American counterparts. We have eight 
examples, they range anywhere from a discount of 6 percent less 
expensive to a maximum of 83 percent in the eight examples I 
brought. On average that represents a 40 percent lower Canadian 
dollar price difference between the American price and the 
Canadian price.
    This is a significant difference. It does not take into 
consideration the Canadian exchange rate, which is additionally 
about 40 percent as we speak today.
    I have an example here, a bottle of 100 tablets, that sells 
at the Canadian pharmacist for $33. That same bottle, same size 
to the U.S. market, nets down to the American pharmacist at 
$194. That is the 83 percent example.
    The next one, this purple pill, which goes off patent, is 
available in Canada for $50.88, and available in the United 
States for $100.48, same dose, a 41 percent lower price, not 
taking into consideration the 40 cents on the dollar when we 
take our American dollars over there.
    A blood pressure medication, this is the 6 percent 
difference, blood pressure medication widely used, $73.94 cents 
for a bottle of 90 in the United States and $70.63 in Canada, 
not taking into account the exchange difference of 40 cents on 
a dollar, and it's a real bargain.
    The next example is a lipid lowering medication, Lipitor, a 
cholesterol lowering drug I should say, and hormones, female 
hormones--47% lower in Canada. A bottle of a thousand Wyeth 
Ayerst, manufactured right up on the New York-Canadian border, 
and in Canada nets down to $121.50 for a bottle of a thousand, 
and in the United States the cheapest price I can get is 
$531.91 for that same thousand. That's a difference of 77 
percent, again, before we take into consideration the American 
exchange on the dollar.
    We think this is a dramatic impact, we think it's criminal 
in fact for our American consumers not to have access to these 
lower prices. We calculated that based on just the 40 percent 
savings not having anything to do with the exchange rate, but 
that's about $845 million a week or $120 million a day that our 
American consumers are paying in higher prices every day that 
this bill is not implemented. We think this is very serious 
money, we think that it's important that we have access to 
Canadian pharmaceuticals, FDA-approved, safe pharmaceuticals, 
through existing distribution channels, and we can accommodate 
that, as I say, in a heart beat through existing distribution 
channels.
    Mr. Chairman, I thank you for the opportunity to present 
today, and I look forward to helping you in any way possible to 
get this legislation enacted and implemented.
    [The prepared statement of Mr. Giroux follows:]

    Prepared Statement of Stephen L. Giroux, Community Pharmacist, 
 Middleport Family Health Center, and Member of the National Community 
  Pharmacists Association, Accompanied by John M. Rector, Senior Vice 
      President for Government Affairs and General Counsel to NCPA
Mr. Chairman, Members of the Committee

    I am Stephen L. Giroux. I am owner of 3 retail community 
pharmacies, a home medical equipment business and a Hallmark card/gift 
and old-fashioned soda fountain shop. Our company has about ten million 
dollars of annual revenue. We are located in upstate Western New York. 
Middleport Family Health Center, Transit Hill Pharmacy, Rosenkrans 
Pharmacy, Lockport Home Medical and Thee Barker Store. I am a past 
president and current member of the board of directors of the Rochester 
Drug Co-Op, a regional drug wholesaler with about 300 million dollars 
of annual revenue doing business in New York and Pennsylvania. I am a 
past president of and board member of the Medina Memorial Health System 
(hospital) and serve on the executive committee of the National 
Community Pharmacists Association (NCPA), formerly the National 
Association of Retail Druggists. [See Exhibit A].* I am accompanied 
today by John M. Rector, Sr. Vice President Government Affairs and 
General Counsel for NCPA.
---------------------------------------------------------------------------
    * The information referred to has been retained in the Subcommittee 
files.
---------------------------------------------------------------------------
    I want to thank you for inviting us to testify on these critical 
consumer and small business issues.
    The National Community Pharmacists Association (NCPA) represents 
more than 25,000 independent pharmacies, where over 75,000 pharmacists 
dispense more than 50% of the nation's prescription drugs and related 
services. Independent pharmacists serve 18 million persons daily. NCPA 
has long been acknowledged as the sole advocate for this vital 
component of the free enterprise system. For decades have been the only 
national pharmacy association with universal state association 
membership, including those of the Committee's members.
    Our members function in the market in a variety of forms. They do 
business as single stores ranging from apothecaries to full line high 
volume pharmacies; as independent chains (e.g., 100 pharmacies) and as 
franchisees such as NCPA members involved with the Medicine Shoppes 
franchise. Whatever the form of business entity, however, independent 
pharmacists are the decision makers for this wide variety of NCPA 
member companies.
    As owners, managers and employees of independent pharmacies, our 
members committed to legislative and regulatory initiatives designed to 
protect the public and provide to them a level playing field and a fair 
chance to compete. We appreciate the opportunity to assist the 
Committee in assessing the differences between American and Canadian 
pharmaceutical prices, how these prices effect the American consumer 
and means to bring American prices in line with Canadian prices.
    In May of 1999, we endorsed the bipartisan International 
Prescription Drug Parity Act, H.R. 1885 by Representatives Marion 
Berry, Bernard Sanders, and Jo Ann Emerson and S. 1191 by Senators 
Byron Dorgan, Paul Wellstone, Olympia Snowe, and Tim Johnson. [Exhibit 
B].*
---------------------------------------------------------------------------
    * The information referred to has been retained in the Subcommittee 
files.
---------------------------------------------------------------------------
    We worked closely with Senators Dorgan and Jeffords and their House 
and Senate allies in support of P.L. 106-387, which with the exception 
of the sunset provision was nearly identical to the language 
overwhelmingly approved by the U.S. Senate. [Exhibit C].*
    Our businesses are located about 40 miles from the Canadian border. 
Never a day goes by that in the course of my practice of pharmacy that 
I don't have a conversation with a patient or a patients' family member 
that is concerned with the astronomically high cost of prescription 
drugs.
    At the outset, I must say that we need a Medicare prescription drug 
benefit for our nations elderly. Not some scam like the Bush cash 
discount card that gives absolutely no benefit to our seniors by 
picking PBMs as market favorites creating anti-competitive environment 
that will severely harm the small businesses that we represent [Exhibit 
D].* In any case, we need to get some relief from the high cost of 
prescription drugs for the elderly and the uninsured.
    The drug importation/re-importation law P.L. 106-387 provides an 
excellent free market, safe approach to allow our patients access to 
safe and lower priced, FDA-approved prescription drugs without 
bypassing established distribution channels or the professional 
services of the pharmacist. After all, it's the pharmacist who has a 
well-established trust relationship with patients. As NCPA's president 
John Carson observed last May, ``We are deeply disappointed that 
President Bush reconsidered his announced support for the new law and 
resulting in HHS Secretary Thompson's failure to implement it.'' 
[Exhibit E].*
    The NCPA House of Delegates unanimously approved a resolution on 
October 18, 2000, calling for the expeditous implementation of the new 
law. Today, we reiterate our views.
    The nations retail pharmacies operate in an extremely competitive 
marketplace on razor thin margins averaging less than 3%. My drug 
wholesaler mark-ups are even slimmer. My wholesaler will use alternate 
vendor suppliers for as little as a 1-2% savings. If we are afforded 
through the implementation of P.L. 106-387 the opportunity to import/
reimport safe FDA-approved drugs for a 40-60% savings, we will do it in 
a heartbeat. Those savings will be shared with our buying group members 
who will pass along any savings to the patients they serve.
    Importation can be achieved safely and cost effectively by our 
small regional wholesalers and buying groups through existing 
distribution channels. The large wholesalers and large chains are 
opposing the implementation of the new law which would provide--not 
require--any authorized purchaser the opportunity to import FDA-
approved Rx drugs. Perhaps many of these companies already operate in 
an international marketplace and do not want to give up their 
competitive advantage. Obviously the pharmaceutical manufacturers are 
opposed to any scenario that could alter their present monopolistic 
opportunity for profits.
    We don't bemoan their financial success. As the most profitable 
industry in the world, we do need them to continue to bring innovative 
technologies and life improving and even life saving drug products to 
market--just not at the highest prices in the industrialized world. We 
are also concerned about encouraging patients to obtain their 
medications directly through mail order or by personal trips across the 
border generally neither are legal under current law and importantly 
bypass the valuable counsel, and services of their trusted pharmacist.
    The brand drug manufacturers are creative marketers. For example, 
the brand name manufacturers have disparaged generic drugs for several 
years and yet have purchased generic companies, formed generic 
divisions, and attempted to control that sector. When one brand name 
drug company executive was asked why they didn't pursue the generic 
market by lowering prices of a branded product once all of the patents 
had been exhausted, he said that they would not be able to make 
sufficient money. The brand name drug industry is unique in that it 
frequently raises prices when patents expire and their market share is 
reduced.
    In a similar vein the brand drug manufacturers have creatively 
claimed that imported or reimported prescription drugs that they or 
their parent companies have made threatened the safety of the American 
consumers. For many years consumers, through mail order, border 
crossings, and more recently the Internet, have been obtaining FDA-
approved prescription drugs from other countries, however, it was only 
when the U.S. House of Representatives and the U.S. Senate (74 to 21) 
[Exhibit F] * authorized imports by wholesalers and pharmacists that 
drug makers belatedly expressed serious concerns about the safety of 
imports. [Exhibit G].*
---------------------------------------------------------------------------
    * The information referred to has been retained in the Subcommittee 
files.
---------------------------------------------------------------------------
    Interestingly, the drug manufacturers have been importing 
prescription drugs at record levels [Exhibit H].* The drug makers are 
not sharing the benefits of lower global pricing with American 
Consumers. They are even authorized to import non FDA-approved bulk 
products and export them as finished unapproved prescription drugs. By 
not implementing P.L. 106-387 the Bush Administration is denying 
American consumers especially the elderly and the un-insured equal 
access to the benefit of global prescription drug pricing.
    It's important to recall that all of the drug makers' customers are 
not charged the high prices that even the largest retail pharmacies 
must pay. The drug makers have denied retail pharmacies equal access to 
economies of scale. The discriminatory pricing practices of the drug 
makers have been the subject of the extensive litigation and federal 
and state legislation. Implementation of P.L. 106-387 would provide 
long overdue relief for pharmacists and consumers in a free market and 
non-bureaucratic way. For the Committee's review, I have with me today 
several examples of Canadian prescription drugs obtained from a 
Canadian pharmacist to show the similarity in quality and price 
differences for these basically FDA-approved pharmaceuticals. [See 
Exhibit I.]


                                                    Exhibit I
----------------------------------------------------------------------------------------------------------------
                                                                                                     Savings
                                                                                                    percentage
                                                                                                    calculated
                                                                                                 before Canadian
       Manufacturer              Drug         Package Size     Net US Price     Canadian Price    Exchange rate
                                                                                 Net Wholesale     of 42% on US
                                                                                                      dollar
                                                                                                  expanding the
                                                                                                     savings
----------------------------------------------------------------------------------------------------------------
TAP                        Prevacid         100's            $358.21/100       $200.00/100       44%
                           30 mg
----------------------------------------------------------------------------------------------------------------
Glaxo Smith Kline          Paxil            30's             $65.59/30         $46.04/30         30%
                           10 mg
----------------------------------------------------------------------------------------------------------------
Searle Pfizer              Celebrex         500's            $1109.40/500      $625.00/500       44%
                           200 mg
----------------------------------------------------------------------------------------------------------------
Glaxo Smith Kline          Lamictal         100's            $211.48/100       $33.15/100        84%
                           25 mg
----------------------------------------------------------------------------------------------------------------
Pfizer                     Zoloft           100/250 *        $202.67/100       $160.00/100       21%
                           50 mg                                               $400.00/250
----------------------------------------------------------------------------------------------------------------
Wyeth                      Premarin         100/500 *        $73.20/100        $10.58/100        86%
                           0.3 mg                                              $52.90/500
----------------------------------------------------------------------------------------------------------------
Astra Zeneca               Nexium           30/28 *          $100.42/30        $58.80/28         37%
                           40 mg
----------------------------------------------------------------------------------------------------------------
Pfizer                     Lipitor          90's             $167.11/90        $144.00/90        14%
                           10 mg
----------------------------------------------------------------------------------------------------------------
Merck                      Vioxx            100's            $220.19/100       $125.00/100       43%
                           25 mg
----------------------------------------------------------------------------------------------------------------
Merck                      Zocor            60/500 *         $181.96/60        $890.00/500       41%
                           10 mg
----------------------------------------------------------------------------------------------------------------
Please note:
* Different dosage forms (i.e. tablets vs. caplets) or different package sizes (as noted).


    On behalf of the members of the National Community Pharmacists 
Association, we thank the Committee for the opportunity to participate 
in the ongoing assessment of the need to provide pharmacists and their 
consumers equal access to global pricing of safe prescription drugs.

    Senator Dorgan. Mr. Giroux, thank you very much.
    Finally, we will hear from Dr. Alan Sager, Professor of 
Health Services and Co-Director of the Health Reform Program at 
Boston University. Welcome, Dr. Sager.

 STATEMENT OF ALAN SAGER, Ph.D., PROFESSOR OF HEALTH SERVICES 
   AND CO-DIRECTOR, HEALTH REFORM PROGRAM, BOSTON UNIVERSITY 
                    SCHOOL OF PUBLIC HEALTH

    Dr. Sager. Mr. Chairman, thank you, and good morning. My 
name is Alan Sager, I am a professor of Health Services at the 
Boston University School of Public Health, and I am honored to 
have the chance to appear before you today.
    The average American will spend $575 this year for 
prescription drugs. Not seniors alone, that's the average for 
all Americans. This is the highest spending in the world. Yet 
70 million of us have no insurance for prescription drugs and 
dozens of millions of others have insurance that is sadly 
lacking. As a result, we have to choose among greater 
suffering, paying more for medications or changing the way we 
do business.
    If Americans paid average Canadian prices for brand name 
drugs, savings would total $38.4 billion this year alone. 
Savings would range from $56 million in Alaska to over one-half 
billion dollars in median states like Arizona and South 
Carolina. Eleven states could save over a billion dollars, and 
California would save over $3.2 billion. But the average state 
like South Carolina or Arizona would save between 500 and $600 
million yearly.
    All Americans could enjoy the benefits of Canadian prices. 
Today, as we've heard, individual citizens are able to import 
drugs from Canada and enjoy the price differences. The 
legislation that you have been advocating today is overall a 
good idea, but I fear that even if it were to pass, it wouldn't 
have the practical effect that many of us would hope. That's 
because I think the manufacturers would produce fewer 
medications in Canada or export fewer medications to Canada, 
drying up supplies in Canadian warehouses and simply making 
fewer pills available for importation back into the United 
States. In other words, they would dry up the reservoir.
    There have also been concerns that other techniques might 
be employed by manufacturers.
    Still, I think that the aim of the legislation is exactly 
what we are trying to achieve, should try to achieve. Americans 
could win the Canadian low prices by importing the regulatory 
techniques that Canadians employ, not the lower priced drugs 
themselves. We don't need to wash our medications through a 
Canadian laundry.
    If U.S. drug prices stay high, insurers and employers will 
work ever harder to suppress drug use through higher copayments 
and formularies and other methods, but suppressing drugs just 
flies in the face of economic and medical realities.
    Economically, the marginal cost of making more drugs is 
typically very low once you do the research and build the 
plant. Medically, restricting use denies many patients the 
medications they need, as we have heard, and the nation would 
directly gravitate toward a Rolls Royce drug market.
    Lowering drug prices requires bringing all stakeholders to 
the table, including drug makers, which requires getting past 
drug makers' bluster about supposed free markets that 
supposedly legitimate the world's highest prices. And also 
getting past drug makers' threats that lower U.S. prices would 
destroy research.
    Careful public action is much less likely to damage 
research than is the industry's commitment to run their 
business as usual. High drug prices frighten many Americans and 
that can translate into precipitous political action two or 4 
years from now, and that would gut prices, and that will harm 
research. So I think if we care about research, we can't let 
the industry control prices.
    That's like what Clemenceau said about the French generals. 
He couldn't trust them to control the war, because that led to 
4 years of blood, machine guns, barbed wire and trench warfare. 
That's what we face with prescription drugs.
    Our nation generates so great a share of drug makers' 
incomes that we have to cut prices carefully. Here are four 
elements of a package deal that might be called a prescription 
drug peace treaty.
    First, the federal government enacts a law to lower brand 
name drug prices to Canadian levels. This alone cuts drug 
makers' revenues by $38 billion yearly.
    Second, drug makers would replace most of the lost $38 
billion through higher volume in the private market. They would 
be filling more prescriptions owing to lower prices.
    Third, the federal government would guarantee the drug 
maker could recoup any amount of the $38 billion that they 
didn't make up in the private market, through publicly-
subsidized purchase of medications for people who couldn't 
afford even the discounted prices. So you take away $38 billion 
but you give it back to drug makers as they fill more 
prescriptions. It's simple recycling. All dollars saved are 
recycled to buy more drugs.
    The fourth element of the peace treaty makes drug makers 
financially whole. They would have to be paid the extra 
manufacturing costs of the additional pills. Retailers would 
have to be paid the extra dispensing costs.
    As a result, all Americans of all ages can afford the drugs 
their doctors prescribe, drug makers' profits and capacity to 
finance research are unimpaired, but we avoid windfall profits 
to drug makers through the Medicare prescription drug benefit 
if the prices weren't contained.
    If this were to happen, I estimate that up to 977 million 
additional prescriptions for brand name drugs might be filled 
if Americans could afford them. That's a high-side estimate. 
The added cost of manufacturing and dispensing almost one 
billion more prescriptions, which is a one-third increase above 
current levels, would be in the range of $6.4 to $11.8 billion, 
depending on dispensing fees and added costs of manufacture, to 
protect all Americans against the cost of medications.
    That may seem like a low estimate, but I think it's 
warranted by the likely dispensing costs of these drugs and by 
the likely actual manufacturing costs.
    To make this work for the long haul, though, we have to 
continue to promote breakthrough research, and that means 
rewarding breakthrough research very generously, but not 
rewarding copy cat research, on which up to 40 percent of 
research dollars today, in my opinion, are largely wasted.
    The final job is to keep costs low and affordable so we can 
get medications to all Americans for the next 5, 10 or 20 
years. No one tool will suffice, but there some obvious 
candidates.
    First, cut marketing waste. Drug makers' marketing costs 
appear to be substantially greater than estimates from 
industry-related sources suggest. The second chart from the 
supplemental package shows how drug makers actually spend their 
money according to their own financial reports, and we see that 
in that pie chart, that 31 percent of drug maker revenue goes 
to marketing and administration, versus only 11 percent to R&D, 
and the lion's share of the marketing and administration, we 
believe, does go to marketing.
    The next chart shows the increase in employment in 
marketing, employment in marketing and employment in research 
between 1990 and 2000. The blue chart trends up slightly for 
research, up about 10 percent. Marketing employment is up about 
50 percent. That's money that we pay for when we buy our pills.
    A couple of other approaches. Measure each drug's efficacy, 
and compare with the costs, and disseminate the real evidence 
on which drugs work for which patients, perhaps through NIH or 
FDA, or perhaps an independent agency that would have no 
financial stake.
    The final step is to think harder about profits. For 
example, in 1999, Merck reported consolidated before-tax return 
on revenue of 26 percent, but Merck apparently garnered an 
actual 37 percent before-tax return on revenue, more than 40 
percent greater after factoring out its MEDCO PBM-related 
costs.
    In conclusion, we can learn a great deal from the evolution 
of state efforts to wrestle in the trenches with prescription 
drugs. Their first phase was throwing money at the problem by 
buying medications; that was vital to do.
    Their second phase now is holding down prices. The federal 
government should marry these two approaches from the start, 
lower prices and higher volume. Winning affordable medications 
for all Americans is the easiest problem to solve in the United 
States of America.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Dr. Sager follows:]
 Prepared Statement of Alan Sager, PhD., Professor of Health Services 
  and Co-Director, Health Reform Program, Boston University School of 
                             Public Health
americans would save $38 billion in 2001 if we paid canadian prices for 
                     brand name prescription drugs
How to Win Those Savings and Use Them to Protect All Americans against 
      High Drug Costs without Hurting Drug Makers or Drug Research
                 With State-by-State Savings Estimates
Disclaimer: As always, I write and speak only for myself, not on behalf 
of Boston University or any of its components.

Acknowledgment: This testimony rests heavily on analyses conducted with 
my colleague, Deborah Socolar.

    2Earlier reports and testimony on prescription drug costs and 
reform methods are posted on our web site, http://dcc2.bumc.bu.edu/hs/
ushealthreform.htm

    Mr. Chairman and members of the Committee--Good morning. My name is 
Alan Sager and I am a professor at the Boston University School of 
Public Health. I am honored by your invitation to testify today.

I. Introduction
    Together, we face two challenges:

   making all needed medications available to all Americans at 
        affordable prices, while

   building a durable financial foundation under drug research 
        and delivery in the U.S.

    I am convinced we can do both of these. One reason is that we 
already spend enough money to do so. But not if we continue business as 
usual.

II. What is the Nature of the Problem?
    Many Americans can't afford needed prescription drugs because they 
lack insurance, suffer low incomes, and face excessive U.S. prices.
    Today, 70 million Americans of all ages have no insurance for 
prescription drugs. Additional dozens of millions have skimpy coverage.
    Yet American prescription drug spending per person this year is the 
world's highest. Total prescription drug spending will be about $165 
billion this year,\1\ or roughly 11.6 percent of overall U.S. health 
spending.\2\ That is some $575 for the average American.\3\
    The drug cost problem will probably worsen. Drug spending in the 
U.S. is doubling every five years and is rising about three times as 
fast as overall health care spending. Between 1994 and 2000, estimated 
retail prescription spending rose by 116.4 percent while total health 
spending rose by only 34.2 percent.
    If we fail to make vital drugs available to all who need them, 
public fear and anger will grow. But reasonable action today will 
prevent reckless over-reaction tomorrow.
    Our nation must choose among:

   Suffering: Many of us could suffer and die for lack of 
        needed medications, but that is intolerable.

   Paying: We could spend much more public or private money--or 
        both--to buy needed drugs, but that is both unaffordable and 
        unnecessary.

   Changing: We could secure more drugs from manufacturers for 
        the amount we already spend, plus small extra sums to cover 
        drug makers' actual incremental costs.

    Change is the only realistic choice. Buying drugs at lower price 
levels, such as those already prevailing in Canada--as a result of 
government action \4\--is an important first element of that change. 
Today's high U.S. prices make medications unaffordable for many 
patients. They induce private efforts to cut drug use, resulting in 
denial of needed drugs. And they handicap public actions to expand drug 
coverage for more citizens.
III. U.S. Payments for Brand Name Drugs at Canadian Prices
    If Americans paid average Canadian prices for brand name drugs this 
year, savings across the United States would total $38.4 billion, I 
estimate.


             Exhibit Calculating U.S. Savings on Brand Name Drugs If We Paid Canadian Prices in 2001
                                                  ($ billions)
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
1. 2001 brand name drug sales, USA, net of discounts and rebates                                         $113.7
----------------------------------------------------------------------------------------------------------------
2. Assume undisclosed discounts and PhRMA generics of 10%                                               - $11.4
----------------------------------------------------------------------------------------------------------------
3. Conservative estimate of sales, USA, brand name prescription drugs                                  = $102.3
----------------------------------------------------------------------------------------------------------------
4. If U.S. paid Canadian prices, which averaged 62.5 % as high in 2000                                  - $63.9
----------------------------------------------------------------------------------------------------------------
5. Savings if paid Canadian prices in 2001                                                              = $38.4
----------------------------------------------------------------------------------------------------------------
Note: All dollars are those actually paid to brand name prescription drug manufacturers, net of discounts and
  rebates.


A. How the Savings Were Calculated
    1. To calculate the $113.7 billion starting point, we began with 
PhRMA's figure on total projected 2001 U.S. sales net of discounts and 
rebates. We then factored out veterinary sales in line with their 
actual share of PhRMA's 1999 total. The result: $113.7 billion.
    2. We then assumed undisclosed discounts and rebates plus generic 
sales by PhRMA members equal to 10 percent of PhRMA's reported sales. 
(The 10 percent figure may be generous, but we wish to be conservative 
in our estimate of U.S. spending and therefore in the estimate of 
savings gained by paying Canadian prices.) The aim is to address 
PhRMA's stated concern that some U.S. discounts and rebates are not 
publicly disclosed and are therefore not considered by the Canadian 
Patented Medicines Price Review Board in its international price 
comparisons.
    3. This yields a conservative projection of human sales of brand 
name prescription drugs by manufacturers in the U.S. in 2001 of $102.3 
billion.
    4. The Canadian government's Patented Medicine Prices Review Board 
calculated that Canadian brand name drugs' factory prices averaged just 
62.5 percent of those in the U.S.A. in 2000. We applied this to 
calculate how much would be spent in the U.S. in 2001 if we paid 
Canadian prices.\5\
    5. The result: cutting U.S. payments to manufacturers by $38.4 
billion this year.\6\
B. State-by-State Savings
    We apportioned this year's $38.4 billion in estimated U.S. savings 
from paying Canadian prices among the states.\7\ The results are shown 
in the next exhibit. Savings ranged from $3.2 billion this year in 
California to $56 million in Alaska.

                     Exhibit State-by-State Projected Spending on Brand Name Drugs in 2001,
                                  and Savings if the U.S. Paid Canadian Prices
                                                  ($ millions)
----------------------------------------------------------------------------------------------------------------
                           Brand Name                                               Brand Name
                         Drug  Spending    Savings if                             Drug  Spending    Savings if
                           in 2001 at    Paid  Canadian                             in 2001 at    Paid  Canadian
                         Factory Prices      Prices                               Factory Prices      Prices
----------------------------------------------------------------------------------------------------------------
Alabama                  $1,751          $657            Montana                  $264            $99
----------------------------------------------------------------------------------------------------------------
Alaska                   $150            $56             Nebraska                 $706            $265
----------------------------------------------------------------------------------------------------------------
Arizona                  $1,577          $592            Nevada                   $539            $202
----------------------------------------------------------------------------------------------------------------
Arkansas                 $1,019          $383            New Hampshire            $441            $166
----------------------------------------------------------------------------------------------------------------
California               $8,506          $3,193          New Jersey               $4,001          $1,502
----------------------------------------------------------------------------------------------------------------
Colorado                 $1,095          $411            New Mexico               $454            $170
----------------------------------------------------------------------------------------------------------------
Connecticut              $1,528          $574            New York                 $8,037          $3,017
----------------------------------------------------------------------------------------------------------------
Delaware                 $339            $127            North Carolina           $2,896          $1,087
----------------------------------------------------------------------------------------------------------------
D.C.                     $203            $76             North Dakota             $217            $81
----------------------------------------------------------------------------------------------------------------
Florida                  $7,001          $2,628          Ohio                     $4,399          $1,651
----------------------------------------------------------------------------------------------------------------
Georgia                  $2,776          $1,042          Oklahoma                 $1,192          $447
----------------------------------------------------------------------------------------------------------------
Hawaii                   $351            $132            Oregon                   $1,036          $389
----------------------------------------------------------------------------------------------------------------
Idaho                    $377            $141            Pennsylvania             $5,682          $2,133
----------------------------------------------------------------------------------------------------------------
Illinois                 $4,474          $1,679          Rhode Island             $451            $169
----------------------------------------------------------------------------------------------------------------
Indiana                  $2,323          $872            South Carolina           $1,484          $557
----------------------------------------------------------------------------------------------------------------
Iowa                     $1,066          $400            South Dakota             $227            $85
----------------------------------------------------------------------------------------------------------------
Kansas                   $964            $362            Tennessee                $2,403          $902
----------------------------------------------------------------------------------------------------------------
Kentucky                 $1,765          $663            Texas                    $6,797          $2,551
----------------------------------------------------------------------------------------------------------------
Louisiana                $1,701          $638            Utah                     $636            $239
----------------------------------------------------------------------------------------------------------------
Maine                    $515            $193            Vermont                  $207            $78
----------------------------------------------------------------------------------------------------------------
Maryland                 $1,894          $711            Virginia                 $2,404          $902
----------------------------------------------------------------------------------------------------------------
Massachusetts            $2,451          $920            Washington               $1,809          $679
----------------------------------------------------------------------------------------------------------------
Michigan                 $4,384          $1,646          West Virginia            $876            $329
----------------------------------------------------------------------------------------------------------------
Minnesota                $1,683          $632            Wisconsin                $1,969          $739
----------------------------------------------------------------------------------------------------------------
Mississippi              $1,086          $408            Wyoming                  $150            $56
----------------------------------------------------------------------------------------------------------------
Missouri                 $2,047          $768            USA                      $102,300        $38,400
----------------------------------------------------------------------------------------------------------------


IV. Americans Can Enjoy the Benefits of Canadian Prices
    Importing drugs from Canada has the potential to provide a measure 
of relief from high prices to some or even many individuals, so it 
should be tried until more effective price relief can be obtained. I 
expect that individual citizens will be able to continue to pursue 
retail importing solutions that lower their costs, but drug makers will 
continue to block effective wholesale importing solutions. If, indeed, 
importing drugs probably cannot do enough to make all needed 
medications affordable, then more direct techniques will be necessary 
to give Americans the benefits of low brand name drug prices that 
Canadians now enjoy.
    Americans could try to obtain Canadian prices in three ways. First, 
we could travel to Canada, as growing numbers of Americans are now 
doing. Several problems arise. They include inconvenience of obtaining 
a valid prescription and the loss of a single, local pharmacy and 
pharmacist coordinating all of the patient's medications. Worse, it 
becomes necessary to transport something relatively heavy, a person, 
instead of something relatively light, a pill. This defies all we know 
about transportation economics.
    Second, Americans could import drugs from Canada, either 
individually or collectively.
    Some pursue this approach idealistically because they reside in 
border states and are frustrated by visibly lower prices nearby. They 
justly bemoan the burden borne by older or chronically ill patients who 
are today forced to travel across the border to buy drugs at more 
affordable prices. The numbers of people who buy medications from 
Canada is impossible to quantify but appears substantial. One 
Massachusetts senior has received over 700 inquiries in the middle few 
months of 2001 regarding methods of ordering medications from Canada by 
fax through family physicians.\8\
    One objection to this approach is that it creates new and 
duplicative channels of drug distribution, some legal and some possibly 
illegal. Some have raised questions about the safety of the imported 
medications themselves.
    The other objection is that, were the law changed to allow 
wholesale importation of medications at foreign prices, and if the 
volume of imports were to swell, the drug makers would predictably 
adapt, as they have adapted to other types of reform in recent years. 
They probably would:

   export lower volumes of medications from U.S. factories to 
        other nations in the first place, thereby drying up one source 
        of lower-priced prescription drugs;

   hold down the volume of drugs produced at the foreign 
        factories subject to FDA inspection, thereby drying up the 
        other source of lower-priced drugs; and

   try to threaten foreign nations with higher prices if they 
        allow medications to be exported to the U.S.\9\ or simply 
        negotiate or set terms of their sales to other nations that 
        prohibit re-sale of drugs abroad.

    Therefore, I do not expect importing to do enough to make 
medications affordable for all Americans.
    Allowing easier importation of medications is an attractive idea. 
But it resembles other attractive ideas of recent years--many of them 
implemented through changes in legislation or medical practice--that 
have failed to make medications affordable to all Americans. These 
ideas include patenting of copy-cat drugs, developing formularies, 
promoting generic substitution, relying on PBMs, and relying on managed 
care generally. All of these have attempted either to boost competition 
or to reduce spending through care management or price negotiations by 
fragmented buyers.
    All of these ideas for winning lower prices indirectly seemed 
appealing. None--individually or together--has apparently slowed the 
rate of increase in U.S. drug spending. Consider, for example, that 
generic drugs now account for about two-fifths of all U.S. 
prescriptions but less than one-tenth of drug makers' revenues \10\-- 
indicating that today's soaring spending is driven by soaring payments 
for brand name drugs.
    Third, Americans could act more directly to win Canadian 
prescription drug prices by importing the general methods that 
Canadians employ, not the lower-priced drugs themselves. Adopting 
Canadian methods in the United States does not require moving people to 
pills or laundering pills through the Canadian pricing structure. It 
does not hitchhike on foreign regulation. Rather, it would mean 
forthrightly regulating drug prices.
    Simply legislating lower prices for brand name drugs in the U.S. 
could work but passing such a law is obviously difficult politically. 
As you know, the law that actually passed in October of 2000 provided 
for re-importing drugs, but it is unlikely that this law would actually 
lower prices even if it were ever implemented, for the reasons just 
mentioned. We again seem to face the dilemma of ``what can work won't 
pass and what can pass won't work.'' This is demoralizing. It breeds 
cynicism. We can do better.
V. Reassuring the Drug Makers by Negotiating a Peace Treaty
    By themselves, price cuts will hurt drug makers. On the other hand, 
price cuts alone will clearly aid three groups: a) many people who are 
now able to afford their medications; b) the private insurors/HMOs and 
public programs that help to finance medications for most of those 
people; and c) some people who will be able to afford medications (or 
more of their medications) after the price cuts take effect. But price 
cuts will not help those Americans unable to afford even the newly 
reduced prices.
    Happily, price cuts can be combined with other approaches to 
protect both patients and drug makers. If prices are to be lowered to 
Canadian levels, we should at the same time devise methods of 
addressing all stakeholders' legitimate interests, including those of 
drug makers. And including those of all Americans who cannot afford 
prescribed medications today.
    Doing this requires bringing all stakeholders, including drug 
makers, to the table to conduct serious negotiations. And that requires 
filtering out manufacturers' bluster about free markets and 
manufacturers' threats that government interventions to lower U.S. drug 
prices will destroy research.
    No free market sets drug makers' prices. Free markets require many 
small buyers and sellers, so every actor is a price taker, not a price 
maker. Free markets require an absence of artificial restrictions on 
supply, demand, and price. Free markets require easy entry. And free 
markets require that all parties have good evidence about price and 
quality.
    In the prescription drug market, patents, mergers among drug 
makers, entry barriers associated with high research and marketing 
costs, allegations of anti-competitive practices, patients' (and, 
often, physicians') lack of good information about price and quality, 
and patients' inability to act as sovereign consumers combine to mean 
that nothing close to a free market acts to set drug prices.\11\
    Nor do drug makers set prices to cover costs of research (whatever 
those costs really are). Drug makers today are obligated to their 
stockholders to set prices to maximize profits.
    If government acts to win lower prices, ``The lights go out in the 
labs, and there is no R&D,'' according to Tracy Baroni, senior director 
of policy for PhRMA.\12\ This is an example of what my colleague and I 
call PhRMA's fog of fear.
    Reasonably careful, well-tested, and--if possible--negotiated 
government intervention is much less likely to damage research than is 
the drug industry's own insistence on more money for business as usual.
    The drug industry is on a collision course with financial and 
political realities. The industry's insistence on high prices is 
frightening and angering many Americans. A few years from now, that 
anger could translate into precipitous political action to gut drug 
prices. And that would gravely threaten research (and profits). Worries 
that this might happen could make today's drug makers the most nervous 
very-well-dressed people in America.
    Fortunately, government intervention to lower prices to Canadian 
levels can--in combination with other reasonable steps--be designed to 
protect and promote research, and even to protect drug makers' profits.
    Careful U.S. action is vital to protecting and promoting research. 
Unlike other nations, and unlike some U.S. states, the United States 
government cannot simply cut drug prices without regard for the cuts' 
effects on research. Because we buy so great a share (and an increasing 
share) of the world's brand name drugs, the world's drug makers rely on 
the U.S. market for a disproportionate share of their profits and the 
dollars they require to finance research.
Four Elements of a Prescription Drug Peace Treaty
    The challenge is to put together the right package of policies. 
Here is an inter-locking four-part method.
    First, the federal government could enact a law to lower brand name 
drug prices to Canadian levels. If nothing else changed, the price cuts 
would deprive drug makers of $38.4 billion in revenues from the U.S. 
market, as calculated earlier.
    But second, drug makers would replace much or most of this $38.4 
billion in lost revenue through the natural rise in the volume of 
prescriptions filled in the private market. Lower prices allow patients 
to fill more of their prescriptions and do so more often. The relation 
between price and volume for prescription drugs appears to be elastic, 
meaning that the volume of drugs bought by patients in a private market 
grows substantially when prices are cut.\13\
    Third, the federal government could guarantee drug makers that they 
would recoup every penny of lost revenue that was not replaced through 
higher private market volume. The best vehicle for replacing that 
revenue would probably be public subsidies to assist drug purchases by 
patients of all ages who are unable to afford even the newly discounted 
prices. The subsidies would be set to ensure replacement of all the 
revenue lost by drug makers that was not recaptured through higher 
private market volume. This public spending would not result in an 
increase in total spending on prescription drugs. Rather, it replaces 
some of the drug maker revenue lost from the price cut.
    Fourth, the public subsidies would also include dollars needed to 
cover the actual incremental costs of manufacturing the higher volumes 
of drugs. These are relatively low, compared with current total 
costs.\14\ Public subsidies would also cover the added cost of 
dispensing the additional volumes of drugs in pharmacies and elsewhere. 
These two items would result in increased total spending on 
prescription drugs, but these are all that would be required to extend 
pharmaceutical security to all Americans. No additional costs would be 
incurred to pay higher profits to drug makers, because drug makers' 
profits as a percentage of equity would already be preserved and 
protected at the high levels antedating the peace treaty's provisions 
for price cuts, higher private volume, and higher public volume.
    Such a peace treaty achieves three things:

          1. All Americans--not Medicare beneficiaries alone--can now 
        afford to obtain the prescription drugs they require.
          2. Drug makers are kept financially whole. All lost revenue 
        is replaced, and the added cost of producing more pills is 
        covered. Drug makers' profits and capacity to finance research 
        remain intact at today's levels. This guarantee could be 
        maintained for perhaps five years. (It will be useful to 
        consider whether profits should be assured as a percentage of 
        equity or of revenue.)
          3. The actual incremental costs of protecting all Americans 
        are relatively low (as estimated in section VI), making the 
        proposal affordable. Cutting prices to Canadian levels makes it 
        much easier to expand coverage. Manufacturers make up for lower 
        prices with higher volume. In other words, the $38.4 billion 
        squeezed out of the drug makers (by cutting their prices) is 
        returned to them (because many more prescriptions are filled)--
        when they serve patients who previously could not afford needed 
        medications. Manufacturers do forego windfall profits that they 
        would have garnered from higher volume in the absence of the 
        price cuts.

    This straightforward approach works most simply for the short run. 
It makes today's drugs affordable for all. The arrangement could be 
designed to run for perhaps five years. The main remaining questions 
concern how to reward drug makers that develop new medications and how 
to constrain the projected explosive growth in the cost of 
pharmaceuticals. These matters are taken up in section VII.
    High drug prices constitute the main logjam blocking the flow of 
government reforms to win prescription drug security for all Americans. 
Once prices are lowered, it becomes possible to buy medications for all 
people who need them at a price that people and payors can afford.
VI. Estimating Short-Run Costs
    Those who have sought to design a prescription drug benefit for 
Medicare have experienced great frustration during the past two years. 
Estimates of the cost of federal government subsidies rose from $118 
billion for ten years in the first Clinton plan of June 1999 to $318 
billion for ten years in the Senate Democrats' plan of June 2001.\15\
    Some of this is attributable to changes in benefits and some to 
rising estimates of underlying drug spending and other factors. CBO 
projects that drug spending by or for Medicare beneficiaries during the 
decade from 2001 to 2010 will be $1.3 trillion under current law--
without a prescription drug benefit. These projections have themselves 
been rising rapidly.\16\
    Sadly, even at the $318 billion level, only about one-quarter of 
beneficiaries' expected baseline drug costs of the $1.3 trillion (that 
is, costs before the Medicare coverage is introduced--costs that would 
surely rise in the wake of new insurance protection) would be covered, 
requiring very substantial monthly Medicare premiums and out-of-pocket 
payments.\17\ A plan with low premiums and low out-of-pocket payments 
could cost as much as $1 trillion over a decade.\18\
    Some of this is attributable to most proposed legislation's 
inability to limit drug prices meaningfully, resulting in huge windfall 
profits for drug makers. Under most Medicare prescription drug plans, 
drug makers would sell substantially higher volumes of medications at 
only slightly lower prices. Even with 25 percent or 40 percent 
discounts, drug makers' incremental revenue would far exceed their 
incremental cost, generating the windfall profits.
    Much of this is also attributable to drug spending projections that 
take as givens continued unrestricted growth in drug marketing, 
continued unrestricted introduction of expensive new drugs without 
careful evaluation of their incremental benefits to patients, and other 
costs, year after year.
    Clearly, unrestricted increases in drug spending are unaffordable. 
Drug makers would like to imagine that they can marry today's high 
prices in combination with tomorrow's Medicare prescription drug 
benefit that boosts volume at those high prices. But that is a fantasy. 
Even without a Medicare drug benefit, restraint is inevitable--through 
either private or public action. In response to high drug prices, 
employers are establishing higher co-payments to try to suppress the 
volume of drug use. More can be expected in the future if high prices 
persist.
    But that flies in the face of economic and medical realities. 
Economically, the marginal costs of making more medications are 
typically very low, once the research is performed and the factories 
are built. Medically, high prices lead to restrictions on use that can 
deny many patients the medications they need. The nation would 
gravitate toward a Rolls-Royce drug economy when it needs Fords and 
Chevy's.
    To make all of today's medications available to the patients who 
need them at an affordable cost, and to promote research to develop new 
medications, The nation needs two coordinated approaches, one short-run 
(for perhaps the next five years) and the other longer-run.
Short-run Cost Estimates
    Cutting drug prices to Canadian levels yields markedly lower 
estimates of the actual short-run incremental cost of financing full 
prescription drug coverage for all Americans--not only Medicare 
beneficiaries.
    This added cost has two components, retail dispensing costs and 
actual incremental manufacturing costs.
    I estimate that as many as 977 million additional prescriptions for 
brand name drugs would be filled if all Americans could afford the 
medications their physicians prescribed. This is a deliberately 
conservative (high-side) estimate.\19\ It amounts to a one-third 
increase over the total number of retail prescriptions filled in 
2001.\20\ This estimate requires considerable refinement, but it will 
serve for now to permit a rough calculation of the short-run costs of 
pharmaceutical security for all.
    I estimate that the added costs of manufacturing and dispensing 
these 977 million prescriptions would be in the range of $6.4 to $11.8 
billion annually.
The lower of the two estimates assumes
   a dispensing fee per prescription of $3.00 and

   an average incremental manufacturing cost of $3.51 per 
        prescription, or five percent of the projected average retail 
        price for brand name drugs in 2001.\21\

    The sum of the two costs is $6.51 per prescription. Multiplying 
that by 977 million additional brand name prescriptions yields an added 
total cost of $6.4 billion annually.
The higher of the two estimates assumes
   a dispensing fee per prescription of $5.00 and

   an average incremental manufacturing cost of $7.03 per 
        prescription, or ten percent of the average retail price for 
        brand name drugs in 2001.

    The sum of these two costs is $12.03. Multiplying that by 977 
million additional brand name prescriptions yields an added cost of 
$11.8 billion annually.
    This $6.4-$11.8 billion range estimates the full, total incremental 
cost of filling almost one billion additional prescriptions, enough to 
protect all Americans in 2001. Some seven aspects of these estimates 
are worth noting:

          1. These are total incremental costs above estimated 2001 
        spending on brand name prescription drugs. If they are paid 
        publicly, no additional sums for co-payments or premiums are 
        needed.

          2. These incremental costs are a small fraction (3.9 percent-
        7.2 percent) of the $165 billion projected to be spent on 
        prescription drugs in the United States in 2001. That is less 
        than six months' increase in total prescription drug spending--
        increases that have been running around 15 percent annually.

          3. These incremental costs are a fraction of those estimated 
        to be required to cover Medicare beneficiaries alone. Consider 
        the $318 billion Medicare-only estimate for ten years that 
        still leaves very substantial premium and out-of-pocket costs, 
        or the $1 trillion Medicare-only estimate for ten years that 
        eliminates premium and out-of-pocket costs that were mentioned 
        earlier.

          4. Because these are incremental prescription drug costs, 
        they do not include the recycling of the $38.4 billion squeezed 
        out of the drug makers by applying Canadian prices for brand 
        name drugs to the U.S. market in 2001. That is because all of 
        this money is returned to the drug makers through higher 
        private market purchases and higher publicly subsidized 
        purchases of medication in response to the lower prices.

          5. As the $38.4 billion is recycled, the private share of 
        payments for prescription drugs will fall somewhat and the 
        public share will rise somewhat. That is because individuals, 
        employers, and insurors/HMOs will enjoy most of the benefits of 
        the $34.8 billion in price reductions, but these private 
        parties will probably pay a smaller share of the costs of 
        replacing the lost revenue. (I have not yet estimated the size 
        of these offsetting changes.)

          6. Additional costs of higher volumes of generic drugs are 
        excluded from these calculations. That is because pricing 
        methods for generics are different from those for brand name 
        drugs. And discounts are substantially lower. International 
        comparisons of prices typically employ brand name drugs only. 
        As noted, generics today amount to only about 8.6 percent of 
        total U.S. prescription drug spending, even though they are 
        over forty percent of prescriptions. So higher spending on 
        generics should not be substantial under this approach. Also, 
        lower prices for brand name drugs would reduce the price 
        differentials between generics and brand name drugs, probably 
        reducing generics' share of total prescriptions over time.

          7. The estimates do not reflect one-time costs of building 
        pharmacies' capacity to substantially increase the number of 
        prescriptions dispensed annually.
VII. Promoting Development of Breakthrough Drugs, and Containing Long-
        Term Costs So That All Medications Remain Affordable for All 
        Patients
    In the short run, the prescription drug peace treaty described in 
Section V of this testimony would make all of today's needed 
medications available to all Americans at a surprisingly low 
incremental cost.
    Looking forward, a number of strategic interventions must be 
undertaken to keep medications affordable for all Americans and for all 
payors, to promote the development of new breakthrough drugs, and to 
generously reward drug makers that develop those drugs.
    Clearly, today's pace of drug spending increases cannot continue; 
spending that doubles every five years is unaffordable. But even 
reversion to the rates of increase of earlier years could raise grave 
financing problems: five percent or ten percent annual increases in 
drug spending would be very costly because they build on 2001's $165 
billion base.
A. Spurring Research to Develop Breakthrough Drugs
    Several policy and financing approaches should be considered to 
encourage breakthrough research. The first is to reward breakthrough 
research generously. The reward for a new drug should be keyed to the 
magnitude of its clinical benefit (years of life gained, disability 
reduced, and pain and suffering for patient and family relieved) for 
the typical patient who uses it, the number of patients who use it, the 
actual risks and actual costs of research borne by the company that 
develops the drug, the drug's effects on other medical and non-medical 
costs (costs of physician and hospital services, costs of long-term 
care, and the like), and possibly other factors.
    It should be recognized that drugs cannot be cleanly divided 
between breakthrough or non-breakthrough drugs. Rather, they should be 
arrayed on a continuum, with profits set in proportion to the benefits 
and costs just listed.
    This activity is essential because nothing close to a genuine free 
market exists to reward research.
    One clear step should be to cease to reward copy-cat research. 
According to DiMasi, some 40 percent of pharmaceutical research today 
is imitative.\22\ PhRMA claims that its members will conduct $23.6 
billion worth of research in 2001.\23\ If that claim is accurate and if 
40 percent goes to copy-cat research, some $9.4 billion is probably 
being spent sub-optimally from the perspective of society.
    Some would claim that copy-cat research is essential to generating 
competition, and that that is essential to holding down prices. Perhaps 
that is true in today's world (conceptually though not practically, 
since prices have not been held down very effectively). But holding 
down prices by regulation is much simpler. And $9.4 billion is 
accordingly made available to finance breakthrough research this year 
alone.
    Others would claim that some copy-cat drugs could have superior 
efficacy or fewer side-effects. In these cases, their developers should 
profit in proportion to the additional value provided by the copy-cat 
medication.
    In sum, one good way to promote breakthrough research is to pay for 
it generously, and to refrain from generously rewarding copy-cat 
research.
    Another good way to promote breakthrough research is to subsidize 
it publicly through the National Institutes of Health. Such subsidies 
have long been very important to new drug development, and NIH funding 
has been rising rapidly in recent years. Public dollars often finance 
the riskiest share of the research. Drug makers should not profit from 
costs and risks borne publicly, but rather from their own efforts. In 
that way, effort and results are rewarded, not ability to capitalize on 
the accomplishments of publicly-financed research.
B. Containing Costs in Order to Keep Medications Affordable for All
    The peace treaty described in Section V will make today's 
medications affordable for all. The research promotion just described 
will continue to spur the development of new breakthrough medications. 
The remaining challenge is to make tomorrow's medications affordable 
for all.
    This is probably the knottiest job. No one tool will suffice. 
Although other approaches will probably be necessary as well, I suggest 
starting with these three tools:
1. Cut marketing waste
    PhRMA does not, apparently, estimate or report its members' 
marketing costs. Instead, the drug makers cite an estimate from IMS 
Health that drug makers' marketing costs were only $13.9 billion in 
1999. (This estimate is unnaturally low, since about one-half of it is 
the retail value of samples, which grossly exceeds their cost to drug 
makers.) The drug makers did report that their own research spending 
that year was $20.4 billion.
    A more skeptical estimate puts marketing spending at $24 billion 
and research at $10 billion. This rests on an analysis of the 
allocations of drug makers' revenue published in manufacturers' 
financial reports. As shown in the following exhibit, 31 percent of 
drug makers' revenue went to marketing and administration, while only 
11 percent went to research and development.\24\


           Exhibit How Six Drug Makers Spent Their Money, 1999
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Marketing and administration                                        31%
------------------------------------------------------------------------
Research and development                                             11
------------------------------------------------------------------------
Production                                                           32
------------------------------------------------------------------------
Taxes                                                                 6
------------------------------------------------------------------------
Other                                                                 4
------------------------------------------------------------------------
Profit                                                               16
------------------------------------------------------------------------


    The truth may well be somewhere between the two sets of estimates. 
Clearly, more accurate information and analysis is required to resolve 
conflicts and inadequacies plaguing some of the currently available 
data.
    But one piece of evidence is clear--the drug makers' marketing 
employment soared by 57 percent between 1990 and 2000, while its 
research employment rose by only 10 percent, as shown in the following 
exhibit.


               Exhibit PhRMA Members' Marketing and Research/Development Employment, 1990 and 2000
----------------------------------------------------------------------------------------------------------------
                          Type of employment                                1990          2000        % change
----------------------------------------------------------------------------------------------------------------
Marketing                                                                    56,014        87,810        +56.8%
----------------------------------------------------------------------------------------------------------------
Research and Development                                                     43,952        48,527        +10.4%
----------------------------------------------------------------------------------------------------------------


    In today's world, drug marketing aims to maximize company profits. 
Drug makers rely on their current marketing techniques, despite their 
high cost, because these techniques pay off in higher sales. But it is 
far from clear that the nation's patients are getting their money's 
worth. Often, new medications are being widely marketed, advertised, 
and sold even though they are much costlier than older medications they 
replace--and without adequate evidence that they are markedly more 
effective.
    This may be good for drug makers but it is not good or affordable 
for patients. At some point, it will probably be necessary for the 
federal government and the drug makers to negotiate simple and 
enforceable limits on marketing and advertising expenditures.
2. Carefully evaluate the efficacy of each medication and compare 
        efficacy with cost, and disseminate the results to physicians 
        and patients.
    If marketing becomes much less important, how will physicians and 
patients learn about which drugs might be helpful, and whether they are 
worth the money?
    This function should probably be performed by a research office in 
the National Institutes of Health or the Food and Drug Administration, 
or possibly by a separate non-governmental non-profit research 
corporation. Objective evidence on efficacy should be compiled, along 
with the information needed to calculate a fair return on a drug 
maker's investment in a new medication. The objective evidence should 
be disseminated to all physicians, along with recommendations from 
expert panels of physicians and scientists regarding which medications 
are effective and efficient in treating various ailments.
    We can marshal the huge sums now badly spent on marketing, and 
recycle them to finance the job of collecting and disseminating this 
objective evidence.
    Any public agency charged with this work must be insulated 
politically. It cannot be influenced by pressure from cost-cutters to 
downgrade its assessment of the value of a new drug in order to reduce 
public spending. That would undermine citizens' trust. We should not 
substitute information from a public agency motivated to hold down 
spending for information from drug makers motivated to increase 
spending. This consideration might argue for relying on an independent 
non-profit corporation.
3. Give more careful thought to what constitutes fair profits for drug 
        makers
    As my colleague and I have noted,\25\ drug makers' reported profits 
have been extraordinarily high since at least the 1970s. The data in 
the following exhibit indicate that the prescription drug industry's 
return on equity in 1999 of 35.6 percent was 2.21 times as great as the 
41-industry median of 16.1 percent. And the prescription drug 
industry's return on revenue of 18.6 percent was 3.58 times as great as 
the 41-industry median of 5.2 percent.\26\


              Exhibit Prescription Drug Industry Returns on
        Equity and Revenue Compared with 41-Industry Median, 1999
------------------------------------------------------------------------
                                                               Rx/41-
                                prescription   41-industry    industry
                                    drugs        median         ratio
------------------------------------------------------------------------
return on equity                      35.6%         16.1%          2.21
------------------------------------------------------------------------
return on revenue                     18.6%          5.2%          3.58
------------------------------------------------------------------------


    The profits that drug makers actually garner by manufacturing and 
selling prescription drugs may be substantially higher than those they 
report overall. It is important to be clear that, in making this 
statement, I am not in any way suggesting that any drug maker has done 
anything remotely improper. Corporations report corporation-wide 
financial results.
    For example, my colleague and I examined Merck's profits as a 
percentage of revenue (the only measure that could be calculated) after 
factoring out the relatively low returns on revenue of its Medco PBM 
subsidiary.\27\
    Merck reports a consolidated 1999 income before taxes of $8,619.5 
million on revenue of $32,714.0 million, for a before-tax return on 
revenue of 26.3 percent. This includes revenue and profit on Merck's 
large Merck-Medco segment. But how much did Merck make on its 
prescription drug business alone? \28\
    The answer is that Merck garnered a 37.4 percent before-tax return 
on revenue on its prescription drug business. A brief glance through 
Merck's annual report did not reveal this number, though it may be 
there, somewhere. The 37.4 percent return on revenue is more than two-
fifths greater (42.2 percent greater) a return on revenue than the 
consolidated 26.3 percent of revenue that Merck reports overall. The 
calculations are shown in the exhibit that follows.


                    Exhibit Merck Pharmaceutical Segment's Revenues and Profits, CY 1997-1999
                                                  ($ millions)
----------------------------------------------------------------------------------------------------------------
                                                                            1997          1998          1999
----------------------------------------------------------------------------------------------------------------
1. Segment revenue                                                       $12,122.20    $12,839.90    $14,418.70
----------------------------------------------------------------------------------------------------------------
2. Segment profit                                                         $7,396.20     $7,367.30     $8,495.40
----------------------------------------------------------------------------------------------------------------
3. Less all unallocated costs                                             $3,162.90     $2,370.20     $3,109.10
----------------------------------------------------------------------------------------------------------------
4. Segment profit after unallocated costs                                 $4,233.30     $4,997.10     $5,386.30
----------------------------------------------------------------------------------------------------------------
5. Segment profit as % of segment revenue                                     34.9%         38.9%         37.4%
----------------------------------------------------------------------------------------------------------------
Source, Merck & Co., Inc. 1999 Financial Report, p. 55.\29\


    Drug makers say they need high profits to finance research. But 
profits do not finance research. The profits that they report--and that 
are so far above those of other industries--are the sums left over 
after they pay for research, manufacturing, marketing, advertising, 
administration, taxes, and other costs.
    Finally, the drug makers are not willing to identify a ceiling on 
their profits or revenues--the level of profit or revenue beyond which 
no more money is needed to finance useful research. Similarly, the drug 
makers are unwilling to identify any floor on their profits or 
revenues--the level below which vital research would suffer. Their 
position is simple: more money (for themselves) is better. That would 
make sense only if the drug makers operated in a competitive free 
market. They do not, as discussed earlier.
    For all these reasons, it will be necessary to investigate, debate, 
and negotiate the level of profit required to induce drug makers to 
retain their motivation to innovate and produce breakthrough drugs.
VIII. LEARNING FROM THE EVOLUTION OF STATE PRESCRIPTION DRUG POLICY
    Examining the evolution of states' prescription drug policy in 
recent decades may enlighten future federal action. States' first phase 
was paying for drugs. Their second phase is holding down prices.
    All state governments began paying for prescription drugs on a 
large scale through their Medicaid programs. Many others followed with 
special pharmacy programs to subsidize drug purchases for citizens who 
did not qualify for Medicaid, usually for seniors.
    In the past few years, many states have realized that soaring drug 
costs were raising the costs of both of these activities to troubling 
levels.
    States therefore moved from financing to price controls Maine 
legislated an innovative price control law. Vermont sought to cover 
more citizens under the umbrella of its Medicaid rebate. The drug 
industry has challenged these efforts in the courts. If the drug 
industry prevails, states will try other techniques, such as 
establishing themselves as sole buyers or wholesalers of drugs within 
their borders, thereby perhaps avoiding a possible Commerce Clause pre-
emption of state action.
    Thus far, some states have been motivated, politically, to respond 
to the crisis of high drug prices because state governments feel those 
prices directly and because, it appears, ordinary citizens who suffer 
from high drug prices have been able to make themselves heard by some 
state governments.
    States can act to cut drug prices without worrying about the 
consequences for research. The federal government cannot do so.
    The federal government has, in one way, already acted to protect 
itself against high drug prices by legislating low prices for the 
Veterans Administration and the military. Unlike other nations, 
however, the federal government has thus far protected mainly itself--
not all citizens--against high drug costs.
    High prescription drug prices are one of the main reasons many 
Americans cannot afford needed medications. High prices have spurred a 
number of complicated, sometimes well-intentioned, and usually 
ineffective responses, ranging from PBMs to formularies to higher co-
payments to obtaining drugs from abroad.
    High prices spur efforts to reduce use. But this can harm patients 
who would benefit from those drugs, and it flies in the face of the low 
incremental or marginal cost of those drugs.
    Instead of cutting use in response to high prices, federal action 
should cut prices to Canadian levels, in order to facilitate higher 
use, as medically appropriate. This is best done as part of a 
comprehensive prescription drug peace treaty that protects the 
legitimate needs of patients, payors, and drug makers.
                                 NOTES
    1. PhRMA projects $121.7 billion in U.S. domestic sales in 2001 for 
ethical prescription drugs. Sold in the U.S. by U.S. and foreign 
members of PhRMA, these are overwhelmingly brand-name drugs for human 
use. Based on 1999 breakdowns, we calculate that 93.4 percent of this 
is for humans. Applying the 93.4 percent share to the $121.7 billion 
yields $113.7 billion. See Pharmaceutical Research and Manufacturers of 
America, Pharmaceutical Industry Profile, 2001, Appendix tables 11 and 
12, http://www.phrma.org/publications/publications/profile01/
app__a2.phtml#
table__11. It is estimated that some 74 percent of the overall retail 
dollar goes to manufacturers. (See National Association of Chain Drug 
Stores, ``The Facts about Prescription Drug Pricing,'' Alexandria, 
Virginia: NACDS, 1999 (unpublished draft), 3rd quarter 1998, chain drug 
stores only.) Applying this 74 percent share to the $113.7 billion 
yields $153.6 billion in retail sales of prescription drugs for humans. 
We round up to $165 billion to account for generics manufactured by 
non-PhRMA members. In 1998, spending on generics was 8.6 percent of the 
U.S. total. That figure was reported by the Generic Pharmaceutical 
Industry Association, ``Generic Share of U.S. Market,'' Facts and 
Figures, www.gpia.org/edu__facts.html, but it appears that this site is 
no longer in operation.
    2. This rests on the Health Care Financing Administration/CMS 
projection of 2001 total health spending of $1,424.2 billion. See 
Health Care Financing Administration, National Health Projections, 
Table 1, March 2001, http://www.hcfa.gov/stats/NHE-Proj/proj2000/
tables/t1.htm.
    3. This reflects our projection of U.S. population for 1 July 2001. 
The population estimate is built on the U.S. population reported in the 
2000 Census and increases it by the average annual population rise from 
1990 to 2000, and adds one-quarter of a year to move the estimate from 
1 April to 1 July.
    4. David J. Cantor, ``Prescription Drug Price Comparisons: The 
United States, Canada, and Mexico,'' Washington: Congressional Research 
Service, Library of Congress, 23 January 1998; see also U.S. General 
Accounting Office, Prescription Drugs: Companies Typically Charge More 
in the United States than in Canada, Washington: The Office, 1992 (GAO/
HRD-92-110).
    5. Patented Medicine Prices Review Board, Annual Report 2000, 
Ottawa: The Board, 11 June 2001, Figure 8. The report expressed U.S. 
and other non-Canadian prices as percentages of Canadian prices; we 
calculated Canadian prices as a percentage of U.S. prices.
    6. The low Canadian prices for brand name drugs are no aberration. 
Consider these nations' brand name drug prices as a percentage of U.S. 
prices in the year 2000:


------------------------------------------------------------------------
 
------------------------------------------------------------------------
Italy                                                            52.9 %
------------------------------------------------------------------------
France                                                           55.2
------------------------------------------------------------------------
Canada                                                           62.5
------------------------------------------------------------------------
Sweden                                                           63.6
------------------------------------------------------------------------
Germany                                                          65.3
------------------------------------------------------------------------
U.K.                                                             68.6
------------------------------------------------------------------------
Switzerland                                                      69.2
------------------------------------------------------------------------
Source: Patented Medicine Prices Review Board, Annual Report 2000,
  Ottawa: The Board, 11 June 2001, Figure 8.


    7. Actual savings in a given state would vary slightly from those 
calculated here. That is because these calculations make three 
simplifying assumptions:

          a) That prescription drug spending in 2001 is distributed 
        among the states in the same proportions as reported by the 
        Health Care Financing Administration's Office of the Actuary 
        for 1998. (See United States Health Care Financing 
        Administration, 1980-1998 State Health Care Expenditures 
        Estimates, 29 September 2000, posted on-line at http://
        www.hcfa.gov/stats/nhe-oact/stateestimates/.)
          b) That private insurance, Medicaid, and self-pay shares of 
        the market are similar from state to state. These actually 
        varying somewhat from state to state.
          c) That discounts and rebates are shared evenly among the 
        states; in reality, these also vary somewhat from state to 
        state.

    8. Personal communication from Hilda BenEzra (regarding Isaac Ben 
Ezra) to Deborah Socolar, 30 August 2001.
    9. The last tactic would be useful only when drug prices are 
negotiated rather than regulated. I am indebted to John McDonough for 
mentioning this tactic, one that drug makers apparently employed when a 
U.S. state was considering obtaining medications from a Canadian 
province.
    10. Generic Pharmaceutical Industry Association, Facts & Figures. 
See www.gpia.org/edu.
    11. The United States government emphatically rejects PhRMA's 
claims that a free market legitimizes drug makers' prices, or that 
cutting prices is dangerous, by taking a 42 percent (or so) price 
discount for medications for the Veterans Administration and the 
military, and by taking an 18 percent (or so) rebate for the Medicaid 
program. This is the sort of thing foreign governments have long done 
for all their citizens.
    We point to these six specific indicators of the absence of a free 
and competitive market:

          1. Prevailing price disparities are themselves evidence of 
        the lack of a free market for prescription drugs. While 
        different payors today pay very different prices for the same 
        drug, prices would tend to converge if there were a free 
        market. In a free market, price competition would result in the 
        same price throughout the market.
          2. The drug industry's high U.S. prices--prices many times 
        marginal cost of production--also suggest that nothing close to 
        a freely competitive market is at work here. In a free market, 
        prices tend to track marginal costs.
          3. The industry's monopolistic (or oligopolistic) character 
        in many sectors gives drug manufacturers tremendous power to 
        set prices. Recent reports have documented that there is only 
        limited competition within many major categories of medication. 
        For example, in four important categories of drugs, the top-
        selling three drugs accounted for 71-90 percent of 1998 U.S. 
        retail sales. (National Institute for Health Care Management, 
        Prescription Drugs and Intellectual Property Protection, 
        Washington: NICHM Research and Educational Foundation, 24 July 
        2000, p. 2, and p. 6, Figure 4, http://www.nihcm.org/
        prescription.pdf. Similarly, see Henry J. Kaiser Family 
        Foundation, Prescription Drug Trends: A Chartbook, Menlo Park, 
        CA: The Foundation, July 2000, p. 65, and p. 69, Exhibit 4.4, 
        http://www.kff.org/content/2000/3019/PharmFinal.pdf.)
          4. This power will grow as drug makers merge into fewer and 
        larger corporations. (``Mergers Could Kill Competition for 
        Drugs, Spur Price Hikes,'' Associated Press, 28 January 2000.)
          5. Vertical integration--including Merck's control of a major 
        PBM--is also a concern.
          6. And allegations of such anti-competitive practices as 
        suppression of generic competitors are further signs of 
        continued monopoly and oligopoly. (See, for example, U.S. 
        Federal Trade Commission, ``FTC Charges Drug Manufacturers with 
        Stifling Competition in Two Prescription Drug Markets,'' Press 
        Release, 16 March 2000, http://www.ftc.gov/opa/2000/03/
        hoechst.htm; John Martin, ``Conspiracy to Fix Drug Prices: Drug 
        Makers Keep Generic Drugs Off the Market,'' 16 March 2000, 
        http://abcnews.go.com/onair/CloserLook/wnt__000315__CL
        __genericdrugs__feature.html; Ronald Rosenberg, ``Drug Makers 
        Seeks Curb on Sale of Generic Cyclosporin,'' The Boston Globe, 
        7 April 2000; Michael F. Cannon, ``Suppressing Generic Drugs 
        Fleeces Consumers,'' Citizens for a Sound Economy Foundation 
        Issue Analysis, No. 86, 25 February 1999; ``The High Price of 
        Drugs,'' ABC News, 20/20, 23 July 1999, www.abcnews.go.com/
        onair/2020/transcripts/2020__990723__drugs__trans.html; and 
        Sheryl Gay Stolberg and Jeff Gerth, ``How Companies Stall 
        Generics and Keep Themselves Healthy,'' The New York Times, 23 
        July 2000, http://www.nytimes.com/library/national/science/
        health/072300hth-generic-drugs.html.)
    12. Cited in Deborah Baker (Associated Press), ``Many in Southwest 
Lack Drug Benefits,'' Albuquerque Journal, 7 September 2000. Ms. Baroni 
was testifying before the New Mexico legislature's Health and Human 
Services Committee.
    13. First, some market responses to predictions of lower drug 
prices suggest that high sales volumes would offset threatened price 
discounts. Three British drug companies' stock prices rose 3.4 percent 
(Glaxo), 2.3 percent (SmithKline Beecham), and 1.9 percent 
(AstraZeneca) following President Clinton's January 2000 State of the 
Union speech calling for a Medicare prescription drug program. `` 
(Glaxo Leads UK Drugs up after Clinton Speech,'' Dow Jones Newswires, 
28 January 2000.)
    Second, we have seen earlier estimates of the price elasticity of 
demand for prescription drugs ranging from -0.10 to -0.64. (A price 
elasticity of demand of -0.10, for example, would mean that a 1 percent 
price cut for drugs would result in an offsetting 0.1 percent rise in 
volume of drugs purchased. The increase in volume, multiplied by the 
prices of the drugs purchased, would equal the replacement revenues 
garnered by the manufacturers in response to the lower prices.) Much of 
the empirical work on price elasticity of demand for medications rests 
on introduction of, or increases in, co-payments for prescription 
drugs. It is not clear how easily these findings can be generalized to 
price cuts, especially to substantial price cuts.
    Third, a June 1999 Merrill Lynch analysis estimated that a 40 
percent price cut for Medicare recipients lacking prescription drug 
coverage would result in a 45 percent volume increase for these 
individuals. (Merrill Lynch, ``Pharmaceuticals: A Medicare Drug 
Benefit: May Not Be So Bad,'' Merrill Lynch, 23 June 1999.) That 
translates into a price elasticity of demand of -1.125. (A similar 
price elasticity of demand might also apply to the remainder of the 69 
million or more Americans lacking prescription drug coverage.)
    Merrill Lynch also estimated that the same 40 percent price cut 
would net out to a 25 percent price cut for Medicare recipients who 
have prescription drug coverage (because they already enjoy discounts 
estimated to average 15 percent), and that the 25 percent price cut 
would raise the volume of drugs purchased by 10 percent. We suggest 
that is a very conservative estimate of the increase in volume for 
Medicare recipients who have prescription drug coverage. Many 
recipients have very shallow coverage, such as a benefit through an HMO 
with a cap of $500 annually.
    Even with that conservative estimate, the Merrill Lynch report 
concluded that, taking increased sales volume into account, a 40 
percent price cut for Medicare beneficiaries would yield only a 3.3 
revenue loss--or even a slight revenue gain.
    Fourteen months later, Merrill Lynch continues to strongly espouse 
this general position. In August of 2000, Merrill Lynch's health care 
manager, Jordan Schreiber, has asserted that ``Even with drug price 
cuts I think there's a good chance the pharmaceutical group will 
actually come out as a net beneficiary as the presently uninsured 
become customers, albeit less profitable customers.'' (Ian McDonald, 
``10 Questions With Merrill Lynch Healthcare Manager Jordan 
Schreiber,'' TheStreet.com, Fund Watch I, 14 August 2000, http://
biz.yahoo.com/ts/000814/fund1__000814.
html.
    See also Beth M. Mantz, ``Merrill's Tighe Sees $207.08B in `00 
Global Drug Revs,'' Dow Jones Newswires, 25 September 2000.) Other Wall 
Street observers have recently concurred. (See Derrick Jackson, ``Drug 
price cuts won't kill industry,'' The Boston Globe, op-ed, 22 September 
2000.)
    14. Once research is conducted and factories are built, it should 
not be very great. We estimate the marginal cost of additional volumes 
of medications at 5 percent of the retail dollar, or about 6.8 percent 
of the manufacturer's cost. (Taking the manufacturer's share of the 
retail dollar at 74 percent.) How can this be so low?
    First, because producing the medications consumes a relatively 
small share of the average manufacturer's total revenues. In 1999, for 
example, only 32 percent of six large drug makers' revenues, on 
average, was devoted to acquiring raw materials and to manufacturing 
drugs. As this is the average cost, which includes substantial fixed 
costs for engineering, equipment, and workers, then the marginal cost 
of producing additional volumes will be substantially lower. Costs of 
raw materials are typically very low. One report noted that ``the cost 
of the raw materials runs only a few cents in pills that often sell for 
up to $15 apiece.'' (Elyse Tanouye, ``Drug Dependency: U.S. Has 
Developed an Expensive Habit: Now, How to Pay for It?'' The Wall Street 
Journal, 16 November 1998.) A revealing example was reported recently. 
The vital ingredient for Xalatan, a successful medication to prevent 
glaucoma, costs only about one percent of annual sales. (Jeff Gerth and 
Sheryl Gay Stolberg, ``Medicine Merchants: Birth of a Blockbuster; Drug 
Makers Reap Profits on Tax-backed Research,'' The New York Times, 23 
April 2000.)
    Second, private conversations with managers of drug factories have 
supported the 5 percent figure.
    Third, the prices set by manufacturers of generic drugs are very 
much lower than those set by manufacturers of brand name drugs. A Mylan 
executive has asserted that her company sells two-fifths of its 104 
products at prices equal to 10 percent (or less) of the prices charged 
by brand name manufacturers. (Patricia Sunseri, ``FTC Antitrust 
Complaint vs. Mylan,'' 23 December 1998, www.genericaccess.com/
info.html.)
    15. See, for example,
    First Clinton Plan: Associated Press, ``Drug Stocks Soar in Light 
of Medicare Proposal,'' The Boston Globe, 30 June 1999;
    CBO's estimates of cost of first Clinton plan: Robert Pear, 
``Budget Office Says Clinton Underestimated Cost of Drug Plan,'' The 
New York Times, 23 July 1999. Underestimates were attributed by CBO to 
faster growth in underlying drug costs, including drugs for nursing 
home residents (which should be a transfer from Medicaid to Medicare, 
thus result in no real increase in total federal plus state government 
costs), more low-income people expected to apply for federal aid in 
paying premiums and co-payments, and lower expected discounts won by 
PBMs in a federal program than in a private program.
    Senate Democrats' Plan: Robert Pear, ``Rival Medicare Drug Plans 
Are Both Ruled Affordable,'' The New York Times, 9 June 2001.
    16. In only eight months from March 2000 to January 2001, CBO's 
projections for drug spending by or for Medicare beneficiaries during 
the decade from 2001 to 2010 rose from $1.1 trillion to $1.3 trillion 
under current law--without a prescription drug benefit. See Dan L. 
Crippen, ``Laying the Groundwork for a Medicare Prescription Drug 
Benefit,'' Statement before the Subcommittee on Health, Committee on 
Ways and Means, U.S. House of Representatives, 27 March 2001, Table 2.
    17. $318 billion divided by $1.3 trillion equals 24.5 percent.
    18. Anjetta McQueen, ``More Money Needed for Prescriptions,'' 
Associated Press, 16 May 2001.
    19. It assumes the following:


----------------------------------------------------------------------------------------------------------------
                                                                                                       total
                                                                                     added brand    increase in
                          Group of people                              number in        name         brand name
                                                                         group     prescriptions/  prescriptions
                                                                                       person         annually
----------------------------------------------------------------------------------------------------------------
number of Non-Medicare uninsured                                      57,000,000              5     285,000,000
----------------------------------------------------------------------------------------------------------------
number of Non-Medicare underinsured                                   75,000,000              3     225,000,000
----------------------------------------------------------------------------------------------------------------
Non-Medicare subtotal                                                                               510,000,000
----------------------------------------------------------------------------------------------------------------
number of Medicare uninsured                                          13,843,148             15     207,647,225
----------------------------------------------------------------------------------------------------------------
number of Medicare underinsured                                       25,936,014             10     259,360,135
----------------------------------------------------------------------------------------------------------------
Medicare subtotal                                                                                   467,007,360
----------------------------------------------------------------------------------------------------------------
Grand Total                                                                                         977,007,360
----------------------------------------------------------------------------------------------------------------

    20. Some 2.84 billion retail prescriptions were filled in 2000, a 
five percent rise from 1999. Another five percent rise in 2001 would 
mean 2.98 billion prescriptions in 2001. (National Association of Chain 
Drug Stores, ``Facts at a Glance,'' www.nacds.org/wmspage provided 1999 
and 2000 data.) And the 977 million increase divided by 2.98 billion 
equals 33.4 percent.
    21. The average price of a brand name retail drug in 2001 is 
estimated at $70.27, making for an estimated incremental cost of $3.51, 
with the increment estimated at five percent of retail. The $70.27 
average price was calculated by applying the 1999 to 2000 rate of 
increase in price to the average price in 2000. National Association of 
Chain Drug Stores, ``Facts at a Glance,'' www.nacds.org/wmspage 
provided 1999 and 2000 data.
    22. Cited in Merrill Goozner, ``The Price Isn't Right,'' The 
American Prospect, Vol. 11, No. 20, 11 September 2000, http://
www.americanprospect.com/archives/V11-20/goozner-m.html. Goozner also 
reports that ``FDA statistics for the 1990s suggest that about half of 
the industry research is aimed at developing me-too drugs.''
    23. Pharmaceutical Research and Manufacturers of America, 
Pharmaceutical Industry Profile, 2001, Appendix Table 1, http://
www.phrma.org/publications/publications/profile01/
app__a1.phtml#table__1.
    24. The data were compiled from an opportunity sample of seven 
large drug companies (now merged into six) whose financial reports were 
readily on-hand. The drug makers are Merck, Pfizer plus Warner-Lambert 
(which have merged), Bristol-Meyers-Squibb, American Home Products, 
Lilly, and Schering-Plough. We are grateful to Robert DeNoble for his 
careful work in compiling and reducing the financial data. The firms' 
combined 1999 revenue was $114.8 billion. The firms are generally 
representative of the industry.
    25. Alan Sager and Deborah Socolar, A Prescription Drug Peace 
Treaty: Cutting Prices to Make Prescription Drugs Affordable for All 
and to Protect Research: Boston: Health Reform Program, Boston 
University School of Public Health, 5 October 2000.
    26. The prescription drug industry and other industries' data are 
presented in http://www.fortune.com/fortune/fortune500/medians.html. We 
calculated the 41-industry median at the mid-point between the 20th- 
and 21st-ranked industries on each list of 41 industries.
    27. Alan Sager and Deborah Socolar, ``Prescription Drug Spending Is 
Already Enough to Buy All the Drugs All Americans Need,'' Session on 
Cutting Drug Prices and Expanding Coverage--Federal and State Efforts, 
Health Equity and Public Hospitals Caucus, American Public Health 
Association, Monday 13 November 2000.
    28. Merck & Co., Inc. 1999 Financial Report, p. 42.
    29. Note: Unallocated costs are ``indirect production costs, 
research and development expenses and general and administrative 
expenses, all predominantly related to the Merck pharmaceutical 
business, as well as the cost of financing these activities.''
    We calculated these unallocated costs by starting with before-tax 
profits reported for all segments (which do not reflect those costs not 
allocated to any segment) from p. 55 of the Financial Report, and 
subtracting before-tax profits reported on the consolidated income 
statement (which reflect all costs). See Merck & Co., Inc. 1999 
Financial Report, pp. 42 and 55.

    Senator Dorgan. Dr. Sager, thank you very much.
    I regret that we are running out of time due to other 
commitments this morning, but I want to ask just a couple of 
brief questions. First of all, I think the testimony of this 
panel has been excellent and provides some interesting 
perspective about this issue from a range of different points 
on the compass.
    Let me ask you, Ms. Powell, you have heard the testimony 
that preceded yours by the FDA. The question that was left 
hanging was, do the Canadians, and speaking specifically now 
about Canada, do the Canadians have a regime of safety and 
quality assurance and chain of custody that should make 
consumers feel comfortable? So let me ask you that question 
because your industry sells a substantial amount of products 
into Canada and markets a substantial amount of prescription 
drugs in Canada.
    Do the Canadians, in your judgment, give us reasons to 
worry about the safety of their prescription drug supply?
    Ms. Powell. Senator Dorgan, I know that the equivalent of 
FDA, the agency of that reviews and approves or denies 
marketing for prescription drugs in Canada, uses fairly similar 
processes for determining safety and effectiveness. I, however, 
do not know what the distribution system is within Canada. I 
would be happy to do some research and get back to you, but I 
don't know how the Canadian system insures that the product 
sold by the manufacturer in fact gets to the pharmacy through a 
chain of custody, I don't know what their chain of custody 
system is. I would be happy to get back to you on that.
    Senator Dorgan. We will ask a number of groups to determine 
that. Mr. Giroux, you run a pharmacy south of the border, so I 
assume you know what is happening north of the border. Do 
Canadians have reasons to worry about the safety of their drug 
supply?
    Mr. Giroux. In my judgment, clearly not. I think there is 
no difference between the Canadian system and the U.S. system. 
If you look at any one of these products, they are clearly 
sealed from the manufacturing plant and in all likelihood the 
bottles are identical, as you have already pointed out. They 
are coming from the same plants, from the same machines, and 
they are sealed in these packages with a slightly different 
label for the Canadian identifier when shipped to Canada.
    And as all pharmacists do with any product that comes into 
our doors, when we open the package, it has to be sealed. If it 
isn't, it goes back.
    Senator Dorgan. Are there common distributors between, for 
example, a Canadian drugstore north of the New York line and 
your drugstores, are you buying from common distributors?
    Mr. Giroux. There are several of the larger wholesalers who 
do have facilities in Canada and as I mentioned, probably they 
are already potentially taking advantage of this. I don't know.
    Senator Dorgan. So is it likely the chain of custody is 
probably almost identical from a manufacturing plant to the 
same distributor to the drugstore in Canada as to your 
drugstore? So it would be an identical chain of custody?
    Mr. Giroux. Absolutely. And I think the example that the 
gentleman from FDA used in terms of the counterfeit, which I 
think is a somewhat unrelated issue, but he used an example of 
a product that was actually adulterated in Long Island, New 
York and shipped to Chicago. It had nothing to do with the 
Canadian drug distribution system. That can happen in any chain 
of distribution, not necessarily from Canada to the U.S. I 
would be totally confident and comfortable buying these 
products from a Canadian supplier. They are sealed, they are 
intact, if they weren't, we wouldn't buy it, plain and simple.
    Senator Dorgan. Dr. Sager, your testimony was interesting 
because it mentioned some new and interesting approaches, some 
of which may be unable to be dealt with by this Congress, but 
several of you have talked about the need to put a prescription 
drug package in Medicare. I certainly agree with that and feel 
strongly that we should do it. However, if we do that, and we 
are oblivious to the issue of cost, and we see cost increases 
of 16, 18, 19 percent a year, which includes both utilization 
and price inflation, we are just going to break the bank.
    I think what we have to do is address both issues. We need 
to put a prescription drug program in the Medicare program, but 
we need to find ways to put dominant pressure on prices to the 
extent that we can. That is the reason this reimportation issue 
is important. Let me reemphasize that my end goal is not to ask 
people to leave this country to go elsewhere to purchase 
prescription drugs. My end goal is that if the distributors and 
pharmacists can do that, the pharmaceutical manufacturers will 
understand and will reprice their product in this country. That 
is the end stage of this whole thing.
    Mr. Marvin?
    Mr. Marvin. Senator, our people in Maine clearly understand 
that the U.S. Government is involved in the Medicare program 
negotiating with the prices for hospitals, they're involved in 
the Medicare program negotiating prices with doctors, they are 
involved in the Medicare program negotiating with virtually 
every aspect of medicine except prescription drugs. And our 
people in Maine are wondering what's so sacrosanct about the 
drug industry that it should be exempted from dealing with the 
U.S. Government as a negotiator on behalf of citizens as 
opposed to all the other aspects of the Medicare program.
    Senator Dorgan. Ms. Powell, do you want to answer that?
    Ms. Powell. We support a federal Medicare drug benefit. 
However, we believe it can most effectively be administered 
through the private sector and there are a variety of models 
for that kind of program, where the federal government is not 
the sole purchaser of the medicines, but the federal government 
provides support for seniors having access to prescription 
medicines.
    For example, within the Federal Employee Health Benefit 
program, the federal government pays for Federal employees' 
drugs but it does not negotiate a price for drugs, it contracts 
with healthcare providers and we think that Congress should 
look at a variety of those kinds of approaches to providing the 
drug benefit. But I certainly would echo that a Medicare drug 
benefit is needed.
    Ms. Wennar. A couple points I would like to make here. 
First, the private side, let's not forget, they to are having 
some difficulty with prescription drug supplies. Even the 
largest of payers, Wellpoint in California, have told us that 
it's breaking the bank, and they are fairly large in terms of 
negotiating power, and so I think, don't be fooled into a false 
sense of security that by going to the private sector that you 
are going to see this problem resolved.
    And I do agree that prescription drugs do need to be 
covered under Medicare because they are critical, as I pointed 
out, on the provider side, the technology is now here to stay 
in the form of a pill and it is going to continue to grow that 
way.
    I think our concern is that you have to figure out how to 
have access to affordable prescription drugs before you cover 
it under Medicare because if you go out there and you cover it, 
and you can't control the cost, you very well, as you pointed 
out, might have a major issue.
    The other thing is, I would like to just pose a question. I 
mean, I have heard a lot discussed around quality. You know, 
just consider it this way on this side. The FDA does not 
monitor samples in physicians' offices last I checked. They 
don't check the temperatures, they don't check the storage. 
They don't take any consideration in terms of looking at 
things. I don't know whether they have the authority to or not, 
but a lot of medication is being dispensed in the form of 
samples, and nobody monitors that.
    Why would you be any more concerned about the prescription 
drugs coming in the manufacturer's bottle from Canada than you 
would be concerned about physicians giving samples out?
    Ms. Powell. I'm going to disagree with you, because there 
is legislation. FDA, because of the 1998 statute, has extensive 
regulations that control the entire process of sample 
distribution, so I think it's not correct to say that those are 
not controlled. Let me point out----
    Senator Dorgan. We were not talking about control, we are 
talking about whether in practice and whether as a matter of 
fact you have FDA inspectors going out and inspecting samples.
    Ms. Powell. My understanding is that FDA is authorized to 
monitor the process of samples throughout the distribution 
system.
    Senator Dorgan. But I am wondering if they do or not.
    Ms. Powell. That I don't know, but I know that they are 
authorized to.
    And I would also like to point out that samples constitute 
more than 50 percent of the administration and marketing costs 
that Mr. Sager refers to, and samples are one of the mechanisms 
that manufacturers have used, along with their voluntary 
patient assistance programs, to address the problems of people 
who do not have insurance for prescription drugs, and they are 
one of the ways that I know doctors deal with seniors who do 
not have access to insurance.
    But we think a more efficient way is through a Medicare 
drug benefit.
    Senator Dorgan. Dr. Sager, from an academic standpoint--
first of all, I appreciate the work you have done, your 
testimony is very interesting as is all the testimony here--
from an academic standpoint you heard me suggest that if we 
cannot do it the way we want to do it, then we will legislate 
the first step by dealing with Canada only. Does that make 
sense to you?
    Dr. Sager. Well, I think it addresses some of the issues 
that people have been complaining about, yes, but I'm still 
worried about what I think is the likely response of drug 
manufacturers, which will be to limit the supply available to 
Canada for reimportation.
    Senator Dorgan. That was my next point. You assume, and I 
assume, that pharmaceutical manufacturers are making a profit 
with those drugs they sell in Canada, do you not agree?
    Dr. Sager. Right.
    Senator Dorgan. If they are making a profit and limiting 
supply, it seems to me they would be shooting themselves in the 
foot. But having said that, having observed that, can I ask 
again from your standpoint, would you submit for the 
Subcommittee your analysis of methods by which the industry 
could thwart what we do?
    Let us assume that we can pass a piece of legislation and 
get past the point of having HHS and FDA decide they are going 
to implement it. We have always understood that there are 
devices by which the industry can try to undermine the law. We 
have never gotten to that point because we have not been able 
to get through HHS at this point, but I think we are going to, 
and it would be helpful if you would, because you mentioned one 
approach, if you would give us from your standpoint as an 
academician, your thoughts about what approaches might be used 
by the industry that could undermine or thwart the intent of 
legislation like this.
    Now having said that, I must adjourn this hearing because 
of other obligations, but let me make one additional point. I 
think this has been an interesting exchange of views. I think 
the testimony that all of you have brought today has given us a 
record that a number of us will use in various ways, and 
perhaps those who oppose what I am trying to do will use it as 
well.
    I did not mention, and I should have, Senator Wellstone and 
Senator Johnson of South Dakota have been very active here in 
the Senate on this legislation, and I should have mentioned 
them.
    It has been bipartisan, Republicans and Democrats, who are 
interested in doing something in this area.
    Again, thank you for participating. I know some of you have 
come long distances today, but this is a very important issue, 
and we appreciate your attendance.
    This hearing is adjourned.
    [Whereupon, the hearing adjourned at 11:10 a.m.]

                                
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