[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





   THE ECONOMIC ASPECTS OF THE PHARMACEUTICAL INDUSTRY IN THE UNITED 
                                 STATES

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

                                HEARING

                               before the

               SUBCOMMITTEE ON HUMAN RIGHTS AND WELLNESS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 25, 2003

                               __________

                           Serial No. 108-63

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER, 
NATHAN DEAL, Georgia                     Maryland
CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of 
TIM MURPHY, Pennsylvania                 Columbia
MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
JOHN R. CARTER, Texas                CHRIS BELL, Texas
WILLIAM J. JANKLOW, South Dakota                 ------
MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont 
                                         (Independent)

                       Peter Sirh, Staff Director
                 Melissa Wojciak, Deputy Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
              Philip M. Schiliro, Minority Staff Director

               Subcommittee on Human Rights and Wellness

                     DAN BURTON, Indiana, Chairman
CHRIS CANNON, Utah                   DIANE E. WATSON, California
CHRISTOPHER SHAYS, Connecticut       BERNARD SANDERS, Vermont 
ILEANA ROS-LEHTINEN, Florida             (Independent)
                                     ELIJAH E. CUMMINGS, Maryland

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                      Mark Walker, Staff Director
                 Brian Fauls, Professional Staff Member
                          Mindi Walker, Clerk
                     Tony Haywood, Minority Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 25, 2003....................................     1
Statement of:
    Gutknecht, Hon. Gil, a Representative in Congress from the 
      State of Minnesota.........................................    12
    Love, James, economist, Center for the Study of Responsive 
      Law, Washington, DC; Dr. Stephen Schondelmeyer, professor 
      of pharmaceutical economics, University of Minnesota; 
      William Vaughn, director, government affairs, Families USA, 
      Washington, DC; and Stephen Moore, senior economic fellow, 
      Cato Institute, Washington, DC.............................    29
Letters, statements, etc., submitted for the record by:
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................     6
    Gutknecht, Hon. Gil, a Representative in Congress from the 
      State of Minnesota, prepared statement of..................    17
    Love, James, economist, Center for the Study of Responsive 
      Law, Washington, DC, prepared statement of.................    34
    Moore, Stephen, senior economic fellow, Cato Institute, 
      Washington, DC, prepared statement of......................    43
    Vaughn, William, director, government affairs, Families USA, 
      Washington, DC, prepared statement of......................    52

 
   THE ECONOMIC ASPECTS OF THE PHARMACEUTICAL INDUSTRY IN THE UNITED 
                                 STATES

                              ----------                              


                        WEDNESDAY, JUNE 25, 2003

                  House of Representatives,
         Subcommittee on Human Rights and Wellness,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:20 p.m., in 
room 2247, Rayburn House Office Building, Hon. Dan Burton 
(chairman of the subcommittee) presiding.
    Present: Representatives Burton, Gutknecht, Watson, 
Sanders, and Allen.
    Staff present: Mark Walker, chief of staff; Mindi Walker, 
professional staff member and clerk; Nick Mutton, press 
secretary; Brian Fauls and John Rowe, professional staff 
members; Kelly Lorenz, Rob Rubinstein, Will Drinkwater, and 
Tiara Wuethrich, staff assistants; Tony Haywood, minority 
counsel; and Teresa Coufal, minority assistant clerk.
    Mr. Burton. We will go ahead and start the meeting. A 
quorum being present, the Subcommittee on Human Rights and 
Wellness will come to order. I ask unanimous consent that all 
Members and witnesses, written and opening statements be 
included in the record. Without objection so ordered.
    I ask unanimous consent that all articles, exhibits and 
extraneous or tabular material referred to in the record be 
included in the record. Without objection, so ordered.
    And we have other Members of Congress that may be coming in 
to attend the hearing who are very interested in this 
prescription drug issue. So I ask unanimous consent that 
Congressmen Gutknecht, Duncan and Allen be permitted to serve 
as members of the subcommittee for today's hearing. Without 
objection, so ordered.
    This is the third in an ongoing series of hearings being 
held by the subcommittee to examine the problem of high prices 
charged for prescription drugs here in the United States. In 
the United States, we pay a higher price on average for 
prescription drugs than citizens of any other country in the 
world. And the prices continue to go up and up.
    Drug costs have been the fastest growing component of 
health care expenditures for the past several years, climbing 
more than 17 percent a year from 1998 to 2001. This double-
digit rate of growth is twice the rate of growth for health 
care costs in general and approximately five times the growth 
rate of inflation. Thanks to this astronomical growth in 
prices, we now have a situation in this country where more than 
one out of five, 20 percent of Americans are unable to take 
their drugs as prescribed because they simply cannot afford to 
buy them.
    This figure climbs as high to 40 percent for some groups, 
including retired, disabled, minority and low income Americans. 
With an aging population, and 108 million Americans already 
managing one chronic health condition such as: heart disease, 
diabetes, asthma or high blood pressure, dependence on 
prescription drugs will continue to rise dramatically, and it 
is going to rise even more when the Baby Boomers start reaching 
senior citizen status.
    Unless the high price for prescription drugs is brought 
down to a more manageable level, we are going to face the very 
real possibility that more and more Americans will be forced to 
choose between purchasing their food and buying their 
prescription drugs.
    To me that is completely unacceptable. In a previous 
hearing on this subject held in April, the subcommittee heard 
extensive testimony regarding the increasing number of 
Americans who are going to Canada for their prescription drugs. 
Why? Because in many cases, the prices charged for a 
prescription drug in Canada can be half or a quarter of the 
price charged for the exact same drug that is sold here in the 
United States. And sometimes it is even less than that.
    Just a few examples. Zocor, a commonly prescribed drug to 
fight high cholesterol, costs $106.84 here in the United 
States, but only $43.97 in Canada.
    Prilosec, a widely prescribed drug to fight stomach 
disorders, acid reflux disease and others, costs $105.50 in the 
United States, and $53.51 in Canada. Procardia XL used to treat 
heart disease costs $110.90 here, whereas in Canada you can buy 
it for $72.82.
    Now, a savings of $38 a month might not seem like a lot to 
many people. But, it can mean a world of difference to senior 
citizens living on a fixed income and constantly worrying about 
how to pay their the next utility bill.
    The savings for Americans buying from Canada can be 
substantial, ranging from 20 to 80 percent. And the U.S. Food 
and Drug Administration estimates that nearly 1 million 
Americans already purchase between $500 million and $1 billion 
worth of prescription drugs from Canada pharmacies every year.
    In 2000, Congress overwhelmingly passed, and the President 
signed into law, legislation that permits U.S. consumers, 
pharmacists and wholesalers to buy FDA approved drugs, 
prescription drugs on the international market, including those 
in Canada.
    However, the provisions of the law have never been 
implemented, even though Congress voted in favor of allowing 
people to purchase their pharmaceutical products from outside 
the country. The provisions of the law have never been 
implemented due to foot-dragging, stonewalling and plain 
obstructionism from the Secretary of Health and Human Services 
and the Commissioner of the FDA.
    Nevertheless, the number of Americans buying their 
prescription drugs from Canada and other countries around the 
world is sure to increase unless the cost of prescription drugs 
in the United States comes down. As we in the House of 
Representatives prepare to take up legislation adding a 
prescription drug benefit to the Medicare program, which I 
think we are going to do tomorrow, I would like to say to my 
colleagues, and everyone who is paying attention to this issue 
that we face an unprecedented budget disaster if we do not 
include some mechanism to restrain the high price of 
prescription drugs in that program.
    It has been estimated by the Congressional Budget Office 
[CBO] and others that it is going to cost about $400 billion 
over 10 years to implement the prescription drug benefit for 
seniors. Others have told us it is going to cost much more than 
that, up to $1.7 trillion over 10 years, and that is a budget 
buster.
    In the 2 years since the study was done by the CBO, in 
which they said that $1.8 trillion over the next 10 years is 
possible on prescription drugs, drug prices have gone up 15 to 
17 percent a year.
    So if CBO were to repeat that study today, the figure 
wouldn't be $1.8 trillion it would be over $2 trillion. Just 
yesterday the Wall Street Journal published an op-ed piece 
authored by two researchers with Texas A&M University. The 
researchers, Mr. Rettenmaier and Mr. Savings, calculated that 
at just the present 12 percent annual growth rate of Medicare, 
the new prescription drug program under discussion in the House 
of Representatives would add an extra $7.5 trillion in unfunded 
liability to the Medicare program for all of the years beyond 
2013.
    That estimate is probably a bit conservative, given that 
drug prices have been increasing over 15 percent a year. 
Nevertheless, even if we spent only the budged amount of $400 
billion between 2003 and 2013 we still need to find a minimum 
of $7.5 trillion to keep just the prescription drug component 
of Medicare functioning in perpetuity. That figure represents 
almost twice the current debt held by the public, our national 
debt.
    Researchers at the American Enterprise Institute scored the 
Senate prescription bill at $12 trillion in unfunded liability 
over perpetuity. Again, the Congressional Budget Office's own 
estimate is that seniors will need close to $2 trillion in 
prescription drugs over the next 10 years, not simply $400 
billion. That is a $2 trillion expense that the already 
financially shaky Medicare program is going to have to absorb 
unless we do something to restrain drug prices.
    Bringing prices down by even 30 percent could reduce that 
$2 trillion price tag by over $600 billion. And that is $600 
billion that could extend the life of Medicare to be used to 
improve our schools, to prepare roads and bridges or bolster 
our homeland defenses. Over the life of the Medicare program, 
we could save trillions of dollars.
    We owe it to tomorrow's seniors, as well as our kids and 
grandkids, to give a Medicare prescription drug benefit that is 
both responsive to seniors needs and fiscally responsible. We 
owe it to them to do something about the high cost of 
prescription drugs and not simply pass a financial burden onto 
our kids and grandkids. I see a lot of young people in the 
audience. This is something that all of you need to think 
about, because this is going to be borne by you as you grow 
older.
    Today's hearings will examine the economics between the 
high prices being forced on American consumers for prescription 
drugs. In previous hearings, we have heard testimony from the 
pharmaceutical industry arguing that Americans have to pay the 
highest prices in the world, otherwise research and development 
of new drugs will come to a screeching halt. This argue is a 
myth and nothing more than a scare tactic.
    The pharmaceutical industry is perhaps the most profitable 
industry in the world, and by a large margin. Even during the 
recent economic downturn, the profits of the top 10 drug 
companies jumped 33 percent, going from $28 billion in 2001 to 
$37.3 billion in 2002.
    On average the drug industry takes in 18\1/2\ percent of 
their income as pure profit, spends 32 percent of their income 
on advertising to consumers and doctors in order to increase 
demand for the newest, and consequently the most expensive 
drugs, and only 12\1/2\ percent of the income they derive from 
high prices, forced on American consumers, actually goes back 
into research and development.
    The numbers seem to speak for themselves, but I will let 
our distinguished panel of experts explain the contradiction 
between what the pharmaceutical industry says in public 
relations statements, and what they say in their annual report 
to stockholders.
    I want to thank Mr. James Love, an economist from Consumer 
Project on Technology, and Mr. Bill Vaughan, from Families USA, 
and Mr. Stephen Moore, senior economic fellow at the CATO 
Institute for being with us this afternoon.
    And I also want to thank Dr. Stephen Schondelmeyer, 
professor of pharmaceutical economics, at the University of 
Minnesota, and perhaps the Nation's leading expert on the 
economics of the pharmaceutical industry for rearranging his 
schedule to remain in Washington and testify before the 
subcommittee this afternoon. I want to thank you for being 
here, Doctor.
    And finally, I want to thank a true patriot and a true 
fighter, Congressman Gil Gutknecht for taking time away from 
meetings and discussions to be here today. He has been involved 
with this issue for a long time. He has had to withstand the 
slings and arrows of outrageous fortune by fighting the 
pharmaceutical companies, and their lobbyists here in 
Washington.
    And Gil, you deserve an arm and a leg as far as compliments 
are concerned. And also, my colleague Bernie Sanders of 
Vermont. He has been a real driving force in the House on this 
issue. And even though we don't agree on a lot of things, 
Bernie, I really appreciate your hard work on this issue.
    And we have a highly distinguished group of people before 
us here this afternoon, and we are going to hear some creative 
ideas that we hope the administration and everybody working on 
this issue will pay attention to. Some of the insights will 
deal with varied tax credits, tax deductions and research 
subsidies that the pharmaceutical industry receives from the 
United States.
    I don't want to belabor this, but I think we are all 
familiar with the Taxol case, which I want to cite, where the 
National Institutes of Health gave the pharmaceutical industry 
$484 million worth of research to develop the drug and they--
and the health agencies that gave $484 million only got $35 
million in royalties from Bristol-Myers Squibb, and Bristol-
Myers Squibb made a $9 billion profit while paying only $35 
million back to the Federal Government for all of the research 
and development money. All of that was total profit.
    I am a fiscal conservative who believes in free markets. 
But I believe we have to do something about those runaway 
prices, especially since we are going to be passing a 
prescription drug benefit. I think we have a responsibility to 
make sure that citizens can get affordable drugs and not be 
raked over the coals when they have to buy their prescription 
drugs just to survive.
    And as we have said before many times, Bernie, myself and 
others, it is a shame when seniors go to their pharmacist and 
they say, this is something I need for my health. How much is 
it going to cost? And they say, at the pharmacy, it is going to 
cost you $150. And the person lowers their head and turns 
around and walks away. And I think, Gil, you said this many 
times on the floor. And they have to make a choice between 
paying the rent, buying food, or getting their prescription 
drugs.
    And we can do something about that if we pay attention to 
what we are doing right now. With that, let me recognize the 
ranking minority member, Ms. Watson, for an opening statement.
    [The prepared statement of Hon. Dan Burton follows:]

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    Ms. Watson. Mr. Chairman, I want to thank you sincerely. 
And I appreciate the attention that our subcommittee is giving 
to such an important health topic.
    The economics of the pharmaceutical industry in the United 
States affects so many aspects of our society. Employment, 
basic research and development, Wall Street markets, and health 
care delivery are impacted, to just name a few.
    Sitting at the top of the list is the quality of life, a 
concept that we embrace as a people and as a Nation. It is very 
difficult to create a steadfast rule to govern the quality of 
life. But the U.S. Government has elected to express the 
thoughts and ideas of the American public.
    Prescription drug prices are just too high. To protect the 
American quality of life a solution must indeed be found. Mr. 
Chairman, American biotechnology has advanced with astounding 
speed. Dependence on prescription drug has risen dramatically. 
Our population is aging. And over 108 million Americans are 
managing at least one chronic health condition.
    Seniors inherently require a large portion of the 
perspective drugs that are produced. There is no good reason 
why the prices of pharmaceuticals are higher in the United 
States than in any other country in the world.
    The Congressional Budget Office [CBO], estimates that 
seniors will spend $1.8 trillion on prescription drugs in the 
next 10 years. Seniors that have contributed to American 
society throughout their lives should not be forced into a food 
or prescriptive drug dilemma with their retirement dollars. Why 
are drug prices increasing at approximately 17 percent each 
year?
    Mr. Chairman, Congress is adding Medicare reform at the 
same time our subcommittee focuses on pharmaceuticals. Seniors 
want stable and reliable coverage. Seniors would like a 
reasonable solution to high prescriptive drug costs. I commend 
your subcommittee's dedication to collect information.
    Older Americans want Congress to take the time to 
thoughtfully craft legislation that affects our quality of 
life. And that is the process that we are in as we speak.
    Mr. Chairman, I yield back my time.
    Mr. Burton. Thank you, Ms. Watson.
    Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman. And because of what 
you said, the outstanding remarks that you made and what Ms. 
Watson said, there is not a whole lot that I can add. But let 
me just say a few things.
    No. 1, we are coming down to the crunch now. And the key 
point that you made as I was walking in the door, is that if we 
do not deal with cost containment, it is going to be an 
extraordinary burden on an already pressed Federal Government.
    So we have to deal with cost containment. There are a 
number of mechanisms out there that have been discussed for 
years that we are all familiar with. The idea that in a global 
economy, why can't people buy safe and affordable drugs in 
Canada is clearly on the top of many of our minds.
    My guess, Mr. Chairman, is if we just did that, which would 
cost the taxpayers of this country zero, you would have a 
stronger benefit for senior citizens than the bill we are going 
to be looking at for $400 billion over a 10-year period.
    But, we can do more than that. You talked about the issue 
of the fact that the Federal Government has poured in tens of 
billions of dollars into research that have gone into the 
companies, and after the company develops its product, the 
taxpayers get nothing, the consumers of this country get no 
benefits whatsoever.
    And the third element of cost containment, in my view, is 
when you have the Veterans Administration, Medicaid, and all of 
the folks of Medicare, the Federal Government should be able to 
negotiate very, very reasonable prices.
    But we are coming down to the crunch. And the good news, 
from a political perspective, and I say this very, very 
sincerely to you and to Gil Gutknecht and others, is that we 
are seeing a lot of bipartisanship now. We are seeing 
progressives, conservatives, people in the middle, Democrats, 
Republicans, independents, coming together to say we have a 
major health care crisis. We are not going to tolerate elderly 
people not being able to get affordable prescription drugs. But 
we are going to solve this problem without bankrupting America.
    That is the challenge that we face. My hope is, let me be 
very pointed here, is that in a week, I hope--we are going to 
be dealing with this issue we think on Thursday, Mr. Chairman?
    Mr. Burton. Tomorrow.
    Mr. Sanders. I would hope that we can all stand together 
and tell the leadership of the U.S. Congress, that we are not 
going to pass a blank check, that we need cost containment. And 
if your side does it and our side does it, we can yet pull a 
rabbit out of the hat.
    You have already said, and Ms. Watson has already said much 
of what I think has to be said. The industry is the most 
profitable industry in the world. They spend far more on 
marketing and advertising than they do on research. Do not 
believe them when they say, oh, all of these profits and these 
high profits go into research, they are just not accurate.
    They pay their CEOs, in some cases exorbitant salaries. 
C.A. Heimbold, Jr., who is the chairman of Bristol-Myers 
Squibb, CEO received $150 million in compensation in 2001. One 
guy, $150 million. And yet elderly cannot afford prescription 
drugs all over this country.
    Mr. Chairman, we have heard right in this subcommittee the 
Food and Drug Administration, representatives in the industry 
telling us how unsafe it would be, what a terrible problem it 
would be to reimport medicine from Canada. That is just 
absolutely untrue. As you know, Mr. Chairman, I released 2 
weeks ago a research memo prepared by the Congressional 
Research Service.
    This study analyzes in detail the Canadian regulatory 
system for prescription drugs and puts the lie to industry and 
FDA attempts to paint the Canadian prescription drug market as 
some kind of provincial backwater. CRS has convinced me that 
nothing can be further from the truth. The two countries, the 
USA and Canada, regulate prescription drugs in virtually 
identical ways from manufacturing and importation to labeling, 
distribution and sales.
    And the bottom line is, Mr. Chairman, as you know, as Mr. 
Gutknecht knows, after all is said and done, after all of the 
lies that are out there, when we ask them: Tell us, how many 
people of the 1 million people who now purchase prescription 
drugs from Canada have been made ill, have died, the answer was 
zero. Zero. Not one.
    And yet when we talk about the reimportation or the 
importation of lettuce and tomatoes and vegetables and 
strawberries, meats, a whole lot of Americans become ill and 
some die.
    What we are taking on, and I want everyone in this room to 
understand this, is the most powerful lobby in the history of 
the United States of America. A few weeks ago, the New York 
Times reported they are prepared to spend a $150 million this 
year alone, that is just pharma, and not the individual 
companies. They will go into your district, and they have gone 
into your district already. They will go into Gil Gutknecht's 
district, and they will go into any district in this country 
where Members of Congress are prepared to take them on, whether 
they are conservative Republicans, progressives, or Democrats.
    While we have a lot of respect for the researchers in the 
industry who do great work, I have contempt for the CEOs of 
these companies who want to do nothing more than raise prices 
as high as they can possible get away with. So we are making 
some progress. And we are going to work together. And I hope 
that we can defeat them on behalf of the American people.
    Thank you again, Mr. Chairman, for your outstanding 
leadership in this area.
    Mr. Burton. Thank you.
    Mr. Allen.
    Mr. Allen. Mr. Chairman, I just wanted to say thank you for 
holding this hearing. And I will waive any time I have and turn 
to the witnesses.
    Mr. Burton. Well, thank you. Well, we have Congressman 
Gutknecht with us, who has been the leader on this issue for a 
long time. And I am anxious to hear what we has to say. He met 
with the head of HHS, Mr. Thompson, Secretary Thompson. Maybe 
we can enlighten us as to what Mr. Thompson had to say to him 
at lunch today. Did you buy or did he?
    Mr. Gutknecht. I actually bought. I have the receipt, Mr. 
Chairman.
    Mr. Burton. We have to swear you in like everyone else. So 
would you rise?
    [Witness sworn.]
    Mr. Burton. You are recognized, Congressman.

 STATEMENT OF HON. GIL GUTKNECHT, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF MINNESOTA

    Mr. Gutknecht. Well, thank you very much, Mr. Chairman. And 
I want to thank you for all that you have done on this issue. I 
realize, we all have local politics to deal with. I think 
particularly in the State of Indiana, I admire what you have 
done, and I also want to say a very special thank you to Mr. 
Allen and finally and perhaps, most importantly, to Bernie 
Sanders, and something that he said earlier that is so 
important and we need to remind ourselves.
    I remind everyone who ever listens. I try to mention this 
in my special orders. The matter that we are talking about 
today, what Americans pay relative to the rest of the world for 
the same drugs, is not a matter of right versus left. It is 
right versus wrong. And this is simply wrong, to hold American 
consumers captive to pay the worlds highest prices.
    And I have written testimony that I will submit, but I am 
going to depart from that slightly. I will distribute this to 
members of the committee, some charts, many of which you have 
already seen, and we have them up in front, of some of the 
differences. And different groups have done research for us.
    I should go back to the beginning, in terms of how I got 
involved in this issue. It seems a bit bizarre, but I think 
then perhaps you will understand why I feel so strongly about 
this. A number of years ago, probably about 5 years ago, I was 
invited to a town hall meeting with some seniors. And they're 
telling me about their trips to Canada to buy prescription 
drugs.
    And to be really honest about it, I said, well that is 
fine. You know, if you want to go to Canada to buy your drugs, 
that is OK. I didn't really think much about the issue. And 
then something that was totally unrelated happened. The price 
of hogs in the American market dropped from about $37 per 
hundred weight to about $8 per hundred weight. Now, what does 
that have to do with prescription drugs?
    Well, let me explain. My hog producers began to call me and 
say, man, can't do you something about this? In fact, they went 
as far as to say that there were thousands of Canadian hogs 
coming across the borders every day making our supply demand 
problem even worse. And they asked, can't you do something at 
least about all of these Canadian hogs coming in and flooding 
our markets. So I called the Secretary of Commerce. And I 
called the Secretary of Agriculture. And I got the same answer.
    They said, well, that is called NAFTA, that is free trade. 
And all of a sudden a light bulb went on above my head, I said 
wait a second. You mean we have free trade when it comes to 
pork bellies, but we don't have free trade when it comes to 
Prilosec. And they said, well, yeah, I guess that is one way to 
look at it. And I began to realize that American consumers 
could save billions of dollars.
    About that time there was a study done by an HMO in the 
Twin Cities. And they came back with a conclusion and they sent 
us a copy of their study that said if they could simply buy 
their prescription drugs in Canada, and recover half of the 
savings, not all of the savings based on their research, they 
could save their subscribers $30 million a year.
    Now, to that HMO, that is a lot of money. To those 
subscribers and those employers who are paying the bill, that 
is a lot of money. And so I became much more interested in this 
issue, began to do research. And as some people would say, I 
moved from being a fan of this issue, to being a fanatic.
    Now, Winston Churchill described a fanatic as one who 
cannot change their mind and will not change the subject. And I 
literally have almost become a fanatic about this, because, I 
believe in free markets. I believe that if you look at the 
history of people, the wealthiest nations, the wealthiest city 
states, whether it is Singapore or Venice, have always been the 
trading nations.
    But, this is one of examples where American consumers are 
held captive. They are held captive by their own government. 
Worse than that, we have senior citizens, whether it is in 
Maine, or whether it is in Indiana, or you name the State, but 
particularly along the borders, whether it is on the northern 
border or the southern border, we literally have senior 
citizens today that are being treated like common criminals 
because they are trying to save some money on their Tamoxifen.
    Let me given you an example. Recently, and we hear a lot 
about Canada. You will see on my charts--I have one chart that 
just compares American prices with the prices in Munich, 
Germany. And recently, I and one of my staffers, Brandon Lerch, 
were over in Germany. I am also the chairman of the 
Congressional Study Group on Germany. And on our way back we 
went on a little shopping trip to the local pharmacy at the 
Munich Airport.
    Now, most people know that if you want to get a deal, you 
probably don't run out to the airport to shop. Usually that is 
where the piece are the highest. But we went to the Munich 
Airport Pharmacy, and we were able to buy what we believed to 
be 10 of the most commonly prescribed drugs in the United 
States. And you have on the chart what the price was in Munich, 
Germany and then the comparison here in the United States. The 
total came--to the drugs in Munich, Germany was $373.30. Here 
if the United States those same drugs would be $1,039.65. We 
have the receipts to prove this.
    But, let me just call your attention to one drug, because I 
mean, that alone makes me as a representative of good people 
who are trying to do the best and provide for their families 
and be able to afford the drugs that they and their families 
need to stay healthy, but this is one of the examples that we 
should all be just outraged about.
    This is called Tamoxifen. Tamoxifen is one of the most--it 
really is a miracle drug. It is one of the greatest drugs I 
think that we have invented in the last 20 years. Tamoxifen is 
the most effective drug against women's breast cancer. You know 
sometimes we say, well, breast cancer only affects women. We 
need to remind ourselves, it affects everyone in that family. 
So this is an amazing drug for all Americans.
    But, this drug was developed, essentially at the expense of 
the American taxpayers through the NIH. I think the estimate 
that we have, is we have invested something like $684 million. 
We literally, the NIH took this drug through what they call 
phase 2 trials. So most of the research that mattered was done 
at the expense of the American taxpayers.
    Now, that is bad enough. But what made us even angrier is 
we bought this package of drugs at the Munich Airport Pharmacy 
for $59.05, American. Let's just round that off. We bought it 
for $60. This same drug purchased here in Washington, DC, at a 
local pharmacy is $360. I can't defend that. No one can defend 
that. I can't explain that. And it seems to me that we have a 
responsibility as public policymakers to do something about it.
    Now, I don't believe in price controls. But, let me explain 
what I have learned about how they do business in the European 
Union. They use what they call parallel trading.
    In fact in Germany, you know, we hear sometimes about price 
controls. Well, there are modified versions of price controls 
practiced around the world. But, basically in Germany they 
really don't have price controls. What they allow the German 
pharmacists to do is go out and purchase their drugs wherever 
they can get them the cheapest. They call it parallel trading.
    As a result, they can go to Spain or another country in the 
European Union or another supplier, wherever they can get the 
best price on the same drug. And that is what we ought to 
demand here in the United States. And that is a safety-oriented 
version of parallel trading, which they have in Europe today. 
Our estimates are that you can save enormous amounts of money 
for American consumers, not just seniors.
    Now, as Ms. Watson pointed out, the biggest buyers of 
prescription drugs are our seniors. They are the ones who once 
they start, for example, my father takes a drug called 
Coumadin. Coumadin, incidentally, the more I have learned about 
this, I feel like the little boy who came in and asked his 
mother a question. His mother was busy and she said, well go 
ask your dad.
    And the little boy said, well I didn't want to know that 
much about it. I feel a little bit like that little boy. I am 
not sure I want to know this much about it. But this drug 
Coumadin is an interesting story as well. This drug was 
essentially developed at the University of Wisconsin 
veterinarian schools. It was developed as a rat poison.
    But, the interesting thing is this drug in the United 
States, this package of drugs sells for $89.95. We bought this 
drug in Germany for $21. Now, this is the kind of drug that 
once a person reaches a point in their age and physical 
condition, they are going to be taking this drug probably for 
the rest of their life. I am not a doctor, I don't play one 
here in Congress.
    But these are things that I have learned. And I can go 
through this whole package of drugs and talk about the 
differences between what we pay in the United States and what 
Americans pay. But I think best analogy, and what this means in 
having a captive market, and by keeping Americans held captive 
by our own FDA, an example would be what happened for many 
years, and it is starting to relax. But in Japan, if you wanted 
to get a good steak dinner in Japan, it was over $100, a steak 
that you can get in Indianapolis or Burlington, Vermont or in 
Minneapolis, a steak that you can get for $15 or $20 would be 
over $100 in Japan.
    The reason was the Japanese Government literally held 
Japanese consumers captive. They could only buy Japanese 
produced beef. There was no international market. That was also 
true, for example, during the old days of the Soviet Union. The 
Soviets decided that Soviet teenagers did not need blue jeans. 
So they didn't manufacture them. So the demand was very high, 
supply was very limited, and the black market price for a pair 
of blue jeans in Red Square in Moscow was over $100.
    That is what happens when you try to hold markets back and 
you hold consumers captive. Now, I am not arguing for price 
controls. I am not arguing that pharmaceutical companies are 
inherently evil. In fact, I don't even say shame on them, but I 
do say shame on us. Because ultimately we set the public 
policy. Ultimately the Food and Drug Administration works for 
us.
    And it is time for us to take control of this matter and 
require the same kind of parallel marketing that they have in 
Europe to be implemented here in the United States. And when 
that happens, our estimate is, and I think this is a 
conservative estimate, if you look at what the Congressional 
Budget Office tells us, seniors alone in the United States, 
over the next 10 years, they are estimating seniors will spend 
$1.8 trillion on prescription drugs.
    Incidentally, I have other experts who believe that 
estimate is actually low. And if we add a prescription drug 
benefit to Medicare, that number is actually going to go up. In 
fact, one expert told me that it could be as high as $3 
trillion. But let's use the $1.8 trillion. Under the plan that 
I think we should implement, we could see prices in the United 
States drop conservatively by 30 percent. This subcommittee has 
had testimony from Dr. Winter in Vermont that her patients in 
Vermont are saving 62 percent by being able to import their 
prescription drugs from Canada.
    If you look at the chart in the back of this page, you will 
see that our studies and the information that we have been able 
to get, demonstrates that prices are actually cheaper in the 
European Union, in Europe, than they are in Canada.
    So we believe that it is very likely that we can save at 
least 30 percent. Now, I am not good in math. But 30 percent of 
$1.8 trillion is $630 billion. And as the point was made, I 
believe by Mr. Sanders earlier, that the pharmaceutical 
industry, the Pharmaceutical Manufacturers Association, is 
going to spend $150 million lobbying and informing us and the 
public about their problems and the issues.
    Clearly, this is a very small investment when you look at 
the potential savings of just opening markets, of just 
providing market access to American consumers. $630 billion to 
spend $150 million lobbying to keep that from happening, it 
seems to me probably is a good investment.
    So, again, it is not shame on them, it is shame on us. I 
thank you for having these hearings. I think you have at least 
given us an opportunity to have a forum where these issues can 
be honestly discussed. And so I am here at your pleasure, and I 
would be happy to answer any questions, particular if we want 
to talk about safety, because that is an issue that a lot of 
people are concerned about.
    With that, Mr. Chairman, I would yield back whatever time I 
might have left.
    [The prepared statement of Hon. Gil Gutknecht follows:]
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    Mr. Burton. Thank you, Congressman. One thing that might be 
interesting for you to illuminate a little bit more on, it 
doesn't take a great deal of illumination. But, you know, we 
did pass NAFTA. And that was supposed to make sure that there 
was free trade between Canada, Mexico and the United States. 
And you mentioned pork bellies and how American farmers, hog 
farmers were being hurt by the importation of pork bellies from 
Canada.
    Did you find out anything from the Department of Commerce 
or our trade people as to why they haven't looked into why the 
pharmaceutical industry is exempted from the free trade 
agreement.
    Mr. Gutknecht. Well, I can't say why, and I am not sure 
anybody can actually tell us why. Now, we can all surmise why. 
But they are specifically exempted from the North American Free 
Trade Agreement.
    Mr. Burton. Our trade Ambassadors and the people couldn't 
give you any explanation as to why that was the case?
    Mr. Gutknecht. None that I don't think that they are or I 
could probably share on the record. We can all surmise. This is 
a big, big deal. I mean, the differences between Canada and the 
United States are very profound. But the truth of the matter 
is, the differences between the United States and the Mexico 
are even more profound.
    Mr. Burton. Well, I don't have any more questions. I would 
just like to welcome you to be with us on the panel when we 
bring our other panelists up here. The one thing that does 
concern me is that it is so obvious what is wrong here that 
Americans are bearing a huge amount of the burden for research 
and development and production, and sale of these advertising 
for these pharmaceuticals, while the rest of the countries are 
getting off scott free.
    And if the R&D is the problem, and I don't believe that it 
is. But, if the R&D is the problem, research and development, 
then why should the United States be carrying the entire 
burden? It should be spread around the entire world.
    With that, Ms. Watson, do you have any questions of 
Congressman Gutknecht?
    Ms. Watson. I have several. In talking to some of the 
pharmaceutical reps in my office, I said, if you have the same 
product, and you sell it in Canada, and you sell it in the 
United States, and all of the ingredients are identical, why is 
there a difference? And I was told because of the kind of 
health care system they have in Canada, that their Department 
of Health Services negotiate a cap, and that doesn't happen 
here.
    Do you think that we could, with HHS, do the same thing? 
What would it take, and what kind of clout could we combine to 
give us such a thing here.
    Mr. Gutknecht. Well, one of the arguments, Ms. Watson, for 
the prescription drug benefit package that is being discussed 
and potentially will be voted on tomorrow night, is that we can 
use some of that clout to get better prices from the 
pharmaceutical companies.
    And there is some evidence that can happen. But, I also 
have another chart, and I am sorry I don't know if I brought 
enough with me. And it is kind of interesting because----
    Ms. Watson. Is that the same one that is there?
    Mr. Gutknecht. No. I don't have a blow-up of this chart. 
But let me share with you what it is. It is the cost of the 
pharmaceuticals for the Federal Employee Benefit Program. And 
what you find is that, yes, they do get some discounts, but 
they are not nearly as good as the discounts that Canada and 
Germany and other countries enjoy.
    Let me give you a couple of examples. Under the Federal 
Employees--again, this is research done for us by the Office of 
Personnel Management in terms of the price that they actually 
pay.
    But for Blue Cross Blue Shield plan, the cost for Coumadin 
is $55.31. Now, that is better than the retail price of $64.89, 
but it is not that big a discount. Glucophage. The shelf price 
is around $124. They get a discount and they buy it for $90. 
But to put in contrast what they pay in Europe, that Coumadin 
can be bought for $15.80 as opposed to $55, and that Glucophage 
can be purchased for $22 instead of $90.
    So the argument that somehow we are going to get these 
miraculous prices simply by having those buying groups inside 
of Medicare is a specious argument. The only reason I say that 
is, the evidence that we have right now with the Federal 
Employees Benefit Program demonstrates that we are getting a 
little better prices, but not much better prices.
    Ms. Watson. Last time we had this hearing, we heard that 
there is a great deal of danger, and we put our patients at 
risk when they order these through the mail, these 
pharmaceuticals, these prescription drugs.
    Have you been able, in your research, to identify any risk 
at all, and is there a serious problem?
    Mr. Gutknecht. Well, I think Mr. Sanders probably answered 
that question as well as I can. I mean, the FDA has done their 
own research. And we have had Mr. Hubbard here several times. 
There is a little bit of bobbing and weaving, but at the end of 
the day, the bottom line is that they do keep records, they do 
research. The number of people in the last 10 years that have 
died as a result of taking a legal imported drug is an easy 
number to remember, it is a nice round number, it is zero.
    And now, if you compare that, for example, again, using the 
CDC's and the FDA's own records, we know that approximately 
5,000 Americans every single year die of some food-borne 
pathogen. Now, we know that, for example, in fruits and 
vegetables, according to the FDA's own studies, approximately 2 
percent of the fruits and vegetables coming into the United 
States every day, and every day we import thousands of tons of 
food.
    I was surprised to learn myself that last year we imported 
318,000 tons of plantains, for example. The amount of orange 
juice that we bring into this country every day is staggering. 
So the bottom line is, you are much more likely to get sick and 
ultimately die from eating raspberries from Guatemala, than you 
are from taking Coumadin that you may import from Munich, 
Germany.
    Ms. Watson. Back in the early 1980's when--in California, 
the University of California, we identified the virus that 
caused HIV/AIDS. The pharmaceuticals that were developed, and 
one of the responses I get from the companies is that they need 
to have these high costs on their drugs because of the 
research, the R&D.
    And so over the years, we negotiated as a Department of 
Health and Human Services the price, because we had various 
programs throughout the State of California that would give 
this drug out to people who are identified.
    And over the years, it got cheaper and cheaper. They said 
to us, that let us recoup what we put into R&D, and we will 
make it cheaper. Well, this was a brand new discovery of a 
condition. And they then did the research, and the prices did 
come down. I can't understand now why drugs like Coumadin and 
so on are still high here in this country, because the R&D was 
done decades ago.
    Mr. Gutknecht. Well, incidentally, and the Coumadin was 
developed--the research was actually done by the veterinarian 
school at the University of Wisconsin. So--there really weren't 
that many--I don't think the expenses of developing that drug 
were all that high.
    Ms. Watson. So I don't know the truth in all of this. But I 
do understand that after September 11, one of the few 
companies--industries that made profits were the drug 
companies. And big time profits. Because during that time you 
were taking something to go to sleep, to wake up, to ease your 
headache, to ease your pain, etc.
    And I don't know where it is that we can really believe 
that there is a reason for these kinds of prices in the United 
States. Can you help us think through that?
    Mr. Gutknecht. Well, I can only say this: I think most 
corporations price their products at what they believe the 
market will bear. I mean, there is something that you know does 
not--it is not something most companies want to talk about, but 
it is a fact. Whether it is Microsoft or General Motors, 
whatever. One of the interesting things, and part of the reason 
that I got interested in this issue, is when people try to 
mislead me, I become even more curious.
    And one of the answers I originally got when I asked, well, 
why are the prices so much different? They said it is the 
currency rates. Well, I am looking here at the back of this--
and this a book I recommend to anybody. It is called the Big 
Fix. It is by Catherine Greider. On the back of the going it 
has the prices. It says, $14 United States, $22 Canada. So 
there is a difference. But it is more expensive in Canada.
    And, it is on virtually every other product, it is the 
reverse of what they tell us. And so the more I learned about 
this, in fact, even the whole story of price controls, and it 
is very difficult to unravel this, but even the story of price 
controls is somewhat misleading, the story that we received 
from the companies and their representatives. Not every country 
has these very complicated price controls as we are sometimes 
told.
    And the other thing we have been told is that somehow, well 
if they don't participate, they are going to take their patents 
away. Well, that may be the bluff by some countries. But, if 
they are a signator to any kind of world trade agreements, they 
ultimately have to abide by the patent laws that are pretty 
much internationally accepted in all industrialized countries. 
So I would only say that take everything that you hear from 
some of sources with a bit of a grain of salt.
    Mr. Burton. Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman. And thanks very much 
for your testimony, Mr. Gutknecht. Let me jump, and I am in 
agreement with virtually everything that you said, and applaud 
you for your years of hard work on this issue.
    Let me be practical for the moment. I don't know if you 
want to, the chairman asked you a little while ago about Mr. 
Thompson, if you wanted to talk about that. We have got a vote 
coming up, we think maybe tomorrow night, as early as tomorrow 
night, and one of the things is the likelihood of us getting a 
reimportation provision in there.
    What is your views on the Cochran amendment? Which, I have 
a feeling, may be similar to mine, and maybe talk a little bit 
about the reimportation legislation that passed a few years 
ago, and that we constantly hear from spokespeople of the 
industry, that we were told by both Thompson and Shalala that 
it was unsafe. All right. So I wanted to be more practical. 
Where we are now in terms of reimportation? What does the 
administration have to say? Where are we going?
    Mr. Gutknecht. I would be a bit uncomfortable speaking on 
behalf of Secretary Thompson. I can say it was a very 
constructive meeting.
    And I came away from the meeting feeling as if Secretary 
Thompson understands this issue better than we might think. But 
I will say this: From my perspective, I think to a certain 
degree, the Secretary is being held captive himself by some of 
the bureaucracy and the experts inside the FDA.
    And so at some point, we as the policymakers, and in fact, 
he did agree with this statement. They work for us and not the 
other way around. It seems to me that we are going to have to 
continue to apply pressure to get the FDA to do what most of us 
at least believe is the right thing to do, in fact, what most 
consumers believe is the right thing to do.
    In terms of what will happen in the next 24 to 36 hours, I 
don't know. I mean, I honestly don't know. But I do believe 
that facts are stubborn things. And I do believe that 
ultimately we are going to win this issue. I mean, ultimately, 
Americans are going to get access to world class drugs at world 
market prices. Will we do it in the next 36 hours? I don't 
know.
    Now, I have learned in this business, and I was in the 
State legislature. And I will say this: I was the equivalent of 
the whip in the Republican Caucus in the State House of 
Representatives. We never had a closed rule. When we had an 
important issue, we brought it up, we debated it, we offered as 
many amendments as we wanted. The only rule there was no one 
could speak twice until everone had a chance to speak once.
    But, sometimes the debates would go on for 10, 12, 14, 
hours. My own--I believe this down in my bones. And regardless 
of party, regardless of anything else, I think if you are going 
to take up an issue as important as putting a prescription drug 
benefit as part of Medicare, perhaps the single most important 
change in Federal entitlements in 40 years, it seems to me we 
have an obligation to each other, to have a thorough debate, to 
at least allow some amendments.
    And so I would hope that by tomorrow, people will realize 
that this is far too important to try to debate and decide in 2 
hours with no amendments on the House floor. But, what will 
happen? I do not know. I cannot speak for anyone else. I am not 
speaking for any group, just as an American.
    Mr. Sanders. Well, thank you for your comments on that. And 
I would just say that, as has been the case in the past, if we 
had a clean opportunity to bring up a decent amendment as we 
certainly could put together, I think we would win 
overwhelmingly.
    I think you would get strong Republican support, probably 
overwhelming Democratic support, and that frustrates me very 
much. I would just remind the committee that even a couple of 
years ago, you talk about the bureaucracy, and I will talk 
about the powerful special interests. I don't know how many 
people know this.
    But during the campaign, when George Bush was asked, what 
is your view about the right of Americans to get medicine from 
Canada? His initial response is, sounds good to me. Why not? 
What is the problem? That was his initial response. His 
response changed over the years. People got to him.
    So I think that we have an issue that the vast majority of 
the people in this country support us on. I think a clean vote 
would allow Members of Congress to show their support for it.
    So we have to stay vigilant. I just worry about the power 
of an industry which can thwart what the American people, what 
Members of Congress want. Thank you very much, Gil.
    Mr. Gutknecht. Mr. Sanders, if I can just say this. I can't 
speak for anyone else. I don't know what is going to happen in 
the next 36 hours. But I can promise you this. This issue and 
my voice are not going to go silent. We are going to continue 
to press this as long as it takes, because this is an issue 
whose time has come.
    And whether it happens in this bill, whether it happens in 
a discharge petition, whether it happens in some other form, 
sooner or later, we are going to get an opportunity to express 
what I believe is the will of the vast majority of Americans, 
and when that moment happens, we will begin to change the 
course of this debate.
    Mr. Sanders. I will probably see you in the Rules 
Committee.
    Mr. Burton. Thank you, Mr. Sanders. Let me just comment 
before we go to Mr. Allen. I hope you are right, that this is 
an issue that we can continue to fight if we don't prevail 
tomorrow night.
    But, once that genie is out of the bottle, I am very 
concerned that the prices are going to be--that the cost to the 
U.S. taxpayer is going to be so high, and it is going to go up 
so fast, and the dependency of so many seniors on the program 
is going to be so great, that it is going to be awfully hard to 
do something about it. I hope you are right, and I hope we can 
do something about it.
    Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman. I will be very brief. I 
just wanted to get your reaction, Mr. Gutknecht, to one point. 
You talked about fees. You talked about what people pay for 
prescription drugs, the prices charged on a wholesale basis, I 
take it under--or a retail basis under the Federal Employees 
Health Benefits Plan.
    Mr. Gutknecht. Well, that is what Blue Cross Blue Shield 
actually pays for those drugs.
    Mr. Allen. Is that in Minnesota?
    Mr. Gutknecht. No. I think that is for Federal employees 
nationwide.
    Mr. Allen. We ought to check this. My understanding has 
been, that the different companies, different insurance 
companies negotiate on their own. For example, I have been told 
that the Blues negotiate separately. Aetna may negotiate with 
Pfizer or Merck individually on behalf of their beneficiaries. 
But that the Blues negotiate separately. They don't combine 
when they go ahead.
    And in Maine, there is so many misconceptions about the 
Federal Employees Health Benefits Plan. In Maine, people are 
running around saying Federal employees have all of these 
choices. Well, it depends on which State you live in. In Maine, 
we have one choice, we don't have multiple choices at all for 
people like me or any other Federal employees, we just have one 
plan, it is a Blue Cross Anthem Plan.
    But I think that what I suspect that we would find, unless 
I am wrong, that because they negotiate separately, they don't 
even know what, you know what one Blue Cross plan doesn't know 
what another Blue Cross plan is actually getting for a price. 
And if we had more transparency, if we had more understanding. 
So many things are priced in the public market. And anyone in 
the public knows what price is being paid by someone else. This 
isn't true in the prescription drug market, and it seems to me 
it would be--more transparency would be desirable.
    If you would like to comment on it, I would be glad to hear 
your thoughts.
    Mr. Gutknecht. I could not agree with you more. In fact, 
you are going to have Dr. Steve Schondelmeyer who has been one 
of my mentors on this whole issue, who is going to testify 
later. And perhaps he brought with him a chart that he has 
shown to me. And it is amazing. You take the drug Cipro, which 
we all learned a lot about after the anthrax scare.
    And I think his numbers, and he is much more of an expert 
than I am. But the price on Cipro, the wholesale price on Cipro 
can range from over $11 per tablet, down to, I think, 19 cents. 
OK. That is inside the United States. But, in terms of 
transparency, here is an interesting example.
    When we were doing some research earlier we wanted to find 
out what the VA was paying for some of these drugs. And so we 
made an inquiry to the Veterans Administration to find out if, 
in fact, they are getting good prices relative to the rest of 
the world.
    They have written into their contracts that they cannot 
share, and will not share, the prices that they pay for the 
drugs, even with Members of the U.S. Congress.
    Mr. Burton. Really?
    Mr. Gutknecht. Really. And so that is part of the problem, 
is you never really know what the prices are here in the United 
States. And you are absolutely correct. Blue Cross Blue Shield 
of Vermont may not know what Blue Cross Blue Shield of Maine is 
doing.
    But, I think this applies to all of the Federal employees. 
But I can't be certain. As I say, the source for us was the 
Office of Personnel Management.
    Mr. Allen. So you think that is an average probably?
    Mr. Gutknecht. I think that is probably the average. But 
the point really is, you are dealing with a big group, whether 
it is off a nickel or a dime, you are still 40 to 50 percent 
higher than you can buy those same drugs for by walking in off 
the street in Europe.
    Mr. Allen. Mr. Chairman, thank you.
    Mr. Burton. Thank you, Mr. Allen.
    Before you go, I just have one more comment, I hope you can 
join us up here to question the next panel. You mean to tell me 
the VA, that is under the control of the U.S. Congress as one 
of the bureaucracies of the executive branch cannot tell us the 
cost of the pharmaceuticals they are buying because of a 
contract they signed with the pharmaceutical companies?
    Mr. Gutknecht. That is what I am told. We were told that 
very directly.
    Mr. Burton. I would like for the staff to check on that. 
Because I think that is ridiculous. There ought not to be 
anything, unless it is a top secret black secret issue where 
national security is concerned.
    Mr. Gutknecht. I reminded the people over there that I have 
a security clearance as a Member of Congress, that they could 
share this. And, you know, I would even be willing to, I would 
be willing to promise that I wouldn't share the information. 
But we ought to, as policymakers ought to know if we really are 
getting the kind of deals that some people claim, because if 
you look at it, the last study I saw as a member of the Budget 
Committee, I did find out that I think several years ago, 2 
years ago, the estimate was that VA and other Federal agencies 
would buy approximately $5 billion worth of prescription drugs.
    You take a number and, you know, if there were additional 
savings that could be made, even 30 percent, you know, that is 
$1\1/2\ billion. And I haven't been away from Minnesota so long 
that, $1\1/2\ billion is still an awful lot of money.
    Mr. Burton. We will see if they can keep that from us.
    Mr. Gutknecht. And Mr. Chairman, if I could. Pardon me. My 
staff just handed me. Just as another interesting side-bar to 
this, the NIH will not release their total investment in 
pharmaceutical development to Members of Congress.
    Mr. Burton. Are you talking about R&D?
    Mr. Gutknecht. Yeah.
    Mr. Burton. Well, that is baloney.
    Ms. Watson. Question, Mr. Chairman. Can we require an 
audit?
    Mr. Gutknecht. Well, that is an excellent question as well. 
And I think one of the things that I would like to see, and we 
have been pretty busy on other issues here over the last 
several weeks and some of us have been doing a lot of special 
orders and other things on this issue, trying to see if we 
can't move the ball forward. But I think now, if we have a 
little more time to catch our breath, one of the things I would 
like to see perhaps this subcommittee and I would be happy to 
participate with that is lay out the parameters to have the 
General Accounting Office, do some audits, and ask some tough 
questions, and begin to at least get to the bottom of what, 
exactly, do the taxpayers pay for, whether it is the cost of 
the drugs or the amount of research and development. And 
ultimately, I believe that the taxpayers are entitled to some 
rate of return on their investment, which is why I am a co-
sponsor of a bill with Representative Rob Emanuel from Illinois 
who was, as you know, an investment banker, and said that we 
ought to get at least a 10 percent rate of return. Some of the 
stories we have seen is, right now, where we do have royalty 
agreements on some of these drugs, the return is something like 
0.38 percent. And you can actually do better than that in your 
checkbook today. So not a very good rate of return.
    Ms. Watson. Once you do the R&D, the manufacturing of the 
drug costs just pennies. You have these huge vats, and what is 
the cost of a little tiny drug? I was just talking to my staff 
person who had to take Cipro after September 11, and I was 
asking him; he said they received them free. So that meant that 
the Department bought up millions of dollars worth of drugs. 
Now, we ought to be able to understand the cost to all of this. 
We are the policymakers--and I am preaching to the choir, but I 
have to make this point because I am very emotional about it. 
We are the policymakers, and we have to do and appropriate in 
the budget. We ought to know what we are dealing with. And I 
still can't understand why prices for the same product are 
different in Canada than here, but I do know there is a cap. 
But these are the questions we need to raise, Mr. Chairman.
    Mr. Burton. I think having a GAO investigation, and also 
talking to people on the Appropriations Committee and find out 
why they appropriate money for an agency like the VA, and we 
can't see, as Members of Congress who vote for that 
appropriation, we can't see where they are spending it and how 
much they are spending money for.
    Mr. Gutknecht. I will say this, though, Mr. Chairman. We do 
have access. And this is where we are beginning to unpeel this, 
unravel the layers of this onion, if you will. And we are 
getting closer and closer to some interesting things. There is 
a program called the 304B Program that allows disproportionate 
share hospitals access to drugs at incredibly low prices. And 
that is an area where, you know, literally this subcommittee 
could spend, you could have a hearing every 2 weeks for the 
next 3 years to begin to understand this. But this is where, 
ultimately, I think you will find the lowest drug prices in the 
United States.
    But the fascinating thing is, the huge disparity between 
the 304B prices and what the retail price is. And in these 
average wholesale prices, some of these companies have 10 or 11 
different categories. Once again, you will have a very good 
expert in Dr. Steve Schondelmeyer who can explain this 
technically much better than I ever could.
    Mr. Burton. Well, we probably ought to bring the next panel 
up. And I hope you will join us questioning these people.
    Mr. James Love, Mr. Stephen Moore, Dr. Stephen 
Schondelmeyer, and Mr. Bill Vaughan, would you come up and be 
sworn, please. We appreciate your patience. I know you have 
been sitting there for a long time. I hope you didn't get 
saddle sores.
    [Witnesses sworn.]
    Mr. Burton. We will start with you, Mr. Love. We'll go 
right down the line. We are going to have a lot of questions 
for you, in all probability, so we would like for you, if you 
can, to keep your comments to 5 or 6 minutes or 7 minutes. And 
then anything else that you think needs to be given, we can put 
into the record.

 STATEMENTS OF JAMES LOVE, ECONOMIST, CENTER FOR THE STUDY OF 
  RESPONSIVE LAW, WASHINGTON, DC; DR. STEPHEN SCHONDELMEYER, 
PROFESSOR OF PHARMACEUTICAL ECONOMICS, UNIVERSITY OF MINNESOTA; 
  WILLIAM VAUGHN, DIRECTOR, GOVERNMENT AFFAIRS, FAMILIES USA, 
WASHINGTON, DC; AND STEPHEN MOORE, SENIOR ECONOMIC FELLOW, CATO 
                   INSTITUTE, WASHINGTON, DC

    Mr. Love. Thank you very much. My name is James Love. I 
work for a group called the Consumer Project on Technology. It 
is a Washington, DC, nonprofit organization. I've done a lot of 
work on pharmaceutical drugs beginning in about 1991, when I 
was asked by Congressman Ron Widen to look at the contract 
between the National Institutes of Health and Bristol-Myers 
Squibb for the commercialization of Taxol, a cancer drug you 
referred to earlier.
    I do most of my work in the last 7 or 8 years 
internationally, and my first--I am not going to read my 
statement but just bring up some things that are in response to 
the comments that have been made in my 6 minutes.
    In 1997, I submitted testimony in South Africa to the South 
African Parliament Committee on Health on the Issue of Parallel 
Trade. South Africa, at the time, was interested in doing what 
Europe does, which was described very eloquently by 
Representative Gutknecht. They wanted to buy in the world 
market. There was a very inefficient mechanism for distributing 
drugs in South Africa. Prices were priced for the--basically 
for the white population, the wealthier people in the country, 
and the new government was trying to find market-based 
solutions to increase the cost. And that's where I first 
discussed this issue with Representative Bernie Sanders back 
then, because the United States was putting a lot of trade 
pressure on South Africa not to use this mechanism of parallel 
trade. And there was, in fact, a rather extensive Federal 
Government policy to prevent parallel trade across the board 
all over the world and to have prices really set country by 
country, to have market segmentation country by country. And so 
I have been interested in this parallel trade issue for some 
time.
    It has been our position that--and the position of most 
consumer groups that free trade in the area of consumer goods 
has a lot of benefits for consumers, and that--but we recognize 
in the area of medicine that there is an issue between poor 
countries, like countries in Africa, Latin America, and Asia, 
and countries in Europe, the United States, Canada, Japan, and 
areas like that.
    So one recommendation that we focused on very closely is 
we'd like to see liberalized parallel trade in pharmaceutical 
drugs for the higher-income countries between each other, but 
not between the rich countries and the poorer countries. And 
the definition we have focused on has been the World Bank 
definition of high-income countries, which includes not only 
Canada but Japan, the European countries, Australia, New 
Zealand, lots of different countries. I think I wouldn't want 
to rely only on parallel trade from Canada, if I was doing 
this, because Canada is a small country, we are a big market. I 
think the way to think about this is really to think about the 
larger community of high-income countries. But I also think you 
have to send an important signal globally, which is that are 
not going to try and exploit low prices that are sort of, you 
know, the idea of putting products in the market in poor 
countries, the lower prices, because there is a difference 
between a country that has a per capita income of $500 or 
$1,000 per year and one that has $30,000 per capita income. So 
that is one point I want to make, is that I think that it 
shouldn't just be between here and Canada; it should really be 
between high-income countries, of which we pay far more than 
other countries do.
    Second, in my testimony I wanted to call attention to a 
couple of things. One is that the recent circuit court opinion 
in Jazz Photo versus International Trade Commission, which was 
a case involving cameras, appeared to us to overturn the First 
Sale Doctrine on patents, which was a new development. And we 
believe that if you want to exploit parallel trade in 
pharmaceuticals, you will have to overturn or fix this decision 
in the Jazz Photo decision. I am not a lawyer, but I would 
recommend that your committee staff look at the Jazz Photo 
decision to ensure that you are not--that you don't sort of 
achieve the goal of passing the regulatory measure in the 
Congress and find out that there is a First Sale Doctrine issue 
out there that has to be addressed. The Jazz Photo issue 
received almost no publicity whatsoever. And we did contact a 
number of congressional staff about it at the time, but I think 
it was too complicated and esoteric for most people to 
understand what this idea of the First Sale Doctrine means to 
international trade, but it is important as it relates to 
pharmaceuticals.
    Second, I wanted to mention that in the WTO/Trips 
Agreement, there is a provision that says that countries can 
choose their own national policy in the First Sale Doctrine. It 
is Article 6 of the WTO Agreement on Patent Rights and Other 
Intellectual Property Agreements, the Trips Agreement. The 
problem is, that it says that you can't--it has been 
interpreted by many legal experts to say that you can't 
discriminate on that policy among countries based upon income. 
And we believe this is a problem that should and could be 
easily fixed, and we have actually raised both of these issues 
and other very similar issues with both the European Commission 
Trade Officials and with the U.S. Trade Representative in the 
State Department, and asked them to support a solution in the 
trade system that allows us to liberalize trade among the 
wealthy countries, while basically barring the parallel trade 
of medicines from poor countries to rich countries.
    I wanted to make a mention on this question of the R&D. All 
the time I worked on pharmaceutical drugs and all the cases, in 
every single case, every abuse, every problem, every pricing, 
every access issue, the defense is always about research and 
development. That is always basically it. And if you haven't 
had it, if you work in this issue a long time, you would know 
that. That is always what it comes down to.
    So one issue is that there needs to be far better 
transparency. If you look at the tough study where they come up 
with this number of $802 million, it is a case that they 
assigned about a half a billion dollars toward the cost of 
clinical trials. Now, clinical trials is not some sort of mumbo 
jumbo magic thing that nobody can figure out what they cost. 
There is a competitive industry of people who do clinical 
trials, and the FDA has data on the number of patients in 
clinical trials. And someone that can do a little bit of grade 
school arithmetic and do a little math, you can count the 
number of patients that are in clinical trials, you can pick up 
the phone and find out what it costs to do clinical trials from 
the competitive sector which does this, and you can do a 
reality check on the half billion dollar number.
    Now, when we talked to Joe DiMasi and his coauthors, we 
asked him for two numbers. One, what is the average number of 
patients in the clinical trials of your study? And, No. 2, what 
is the per patient cost of clinical trials? And they won't give 
us those two numbers. Now, there is just no reason. Because if 
you have those two numbers, then the reasonableness can be very 
easily verified, because if they don't map in to observable 
data, then there is a problem. I would just like to mention 
that.
    No. 2. There is a lot of IRS data on R&D, because companies 
get tax credits related to R&D. So the IRS, for example, in 
1999, reported that U.S. R&D based on world sales was 7 percent 
of turnover. And if you adjust that for the fact that the 
companies do some R&D overseas, it comes in at under 9 percent 
of turnover for 1999, the last year we had data. And that was 
about roughly half of a comparable number out of the PhRMA 
Survey in terms of the percentage of the sales that was being 
reinvested in R&D. So, there is enough evidence on the record, 
as well as from the Orphan Drug Tax Credit, which relates to 
clinical trials that calls into question some of the popularly 
held numbers about the R&D. And it's I think outrageous that 
there is as much reliance on one person, Joe DiMasi, for the 
cost of drug development, who works consistently for the drug 
companies in producing information, and no effort whatsoever 
even to rely on the government's own data, including, for 
example, what the NIH, has mentioned of problems in getting 
data out of them, spends on the clinical trials which it 
performs at taxpayer expense which are routinely not very 
public.
    I will add that, in a recent FOIA case, the National 
Institutes of Health filled out an affidavit where they said 
the royalty rates on government-funded inventions is a secret, 
and they will not disclose it on an FOIA request. Now, can you 
imagine if I was to get an exclusive right to a government drug 
worth billions of dollars, take the money, and hire hundreds of 
lobbyists to lobby the Congress for whatever cause I wanted to 
do, and someone asked me: Where are you getting all the money 
to do all this activity? And I'd say, well, I have a license to 
a government, you know, patent, and it's worth billions of 
dollars, and we have a lot of resources. And they would say, 
well, how much are you paying for that patent? And I'd say, I 
am sorry, it is a secret. I mean, it's not competitive, I 
didn't really win it in any sort of contest other than a beauty 
contest. But that is essentially the way we license drugs.
    The other thing is that for quite a few drugs the U.S. 
Government actually has a royalty-free license. The U.S. 
Government has a royalty license in d4T, a drug for AIDS which 
you can buy for less than $50 a year outside the United States, 
which costs almost $4,000 a year. It was invented at Yale on a 
government grant. And you can tomorrow buy this from generic 
suppliers and the U.S. Government could on its royalty-free 
rights to the patent. The same thing is true with ddl, ddC, 
Nevirapine and T-20. And those are just drugs for AIDS.
    We have asked the OMB a couple of months ago, we asked 
Mitch Daniels, before he left OMB, if he would write a letter 
to the Department of Health and Human Services and the Veterans 
Administration, asking them how much money they would save by 
exercising the rights they have never used in government-funded 
drugs.
    The last thing I wanted to mention, because I am sure I 
have exceeded my 6 minutes here, is that we think we are on a 
treadmill that is going the wrong direction as far as the trade 
agreement. The U.S. Trade Representative is trying to now solve 
the unequal pricing thing by making everyone else pay higher 
prices. So we now regulate innovative products in Korea by, we 
have a reference pricing system administered by the United 
States on Korean drugs. We require Korea to pay the average of 
what they call the A7 prices on innovative drugs. That is U.S. 
Government regulation of Korean drug prices. We are trying to 
force Australia to raise prices on drugs, New Zealand, Canada, 
quite a few other countries.
    Now, one of the problems is, is that we are spending now 
about 2 percent of GDP, about $200 billion a year. If you were 
to eliminate patent protection altogether, you would easily 
save $150 billion a year in the U.S. market. Now, what do you 
get for that $150 billion? You'd probably about, based on the 
IRS data, roughly about $20 billion a year of R&D financed.
    Now, if that's the case, if companies are, in fact, 
financing about 10 percent of their turnover as the IRS 
indicates in development of new products, that is an expensive 
way to fund R&D. Plus, if you look at the FDA data, they say 
that two-thirds of the new products developed in the last 3 
years are no better than existing therapy. So even if you are 
getting 10 percent of the turnover back in new products, you 
probably only care about half of that.
    The question is, for the next 20 years, can you continue a 
system where you are getting back maybe a dime or a nickel on 
the dollar for R&D as we approach 2 percent of GDP and start 
heading toward 3 percent of GDP? I mean, how far can this go?
    So what we think the change should be is to make the trade 
agreement focus on the percent of GDP which each country has to 
support for R&D. That is a rule that works better for an 
African country, for European, for Canada. It is sort of more 
of an equal rational basis, and give the countries flexibility 
in how you get there. If you want to follow these new open-
source development models, if you want to do high prices, if 
you want to research mandates, public funding, we don't really 
care. We want R&D. But we have to think and examine and think 
newly about new business models for funding R&D, because, 
ultimately, we are buying R&D when we pay these high prices, 
but we are not doing a very good job of being a consumer of the 
R&D purchases.
    And I was just at a meeting today at the World Bank. The 
World Bank is going to schedule a meeting in the fall. Well, 
it's the recommendation anyhow on different business methods, 
business models for funding R&D. And the thinking that people 
have now is you want to separate the marketing after a product 
is developed from when the R&D--the initial development. And 
the goal is to create--this is kind of high tech and far out, 
and I'm probably ruining my whole performance here by being too 
far off the reservation.
    But what we are trying to say is that the original sin is 
to finance R&D out of a 20-year marketing monopoly. I mean, you 
give a company a 20-year monopoly on a drug for cancer, well, 
what do you think they are going to price it at? I mean, they 
know what it means to somebody when they have cancer. You give 
somebody a 20-year monopoly on a drug for heart disease, well, 
of course, they are going to price it pretty high. That is 
basically nature following its own course.
    If you were to find a different way to fund R&D, even a 
competitive, entrepreneurial private-sector business-driven 
thing, you could easily double what the competitive R&D sector 
makes, the biotech sector, all the guys that actually do the 
real innovation, and still come out way ahead and have prices 
priced fairly to people when they actually enter the market.
    The marketing process is the cancer on the drug, the 
system. You can have a very efficient system of distribution, 
you can have a very efficient system of innovation. But when 
you tie the two together and finance R&D with that 20-year 
marketing monopoly, you have a gazillion problems.
    Thank you very much.
    Mr. Burton. Thank you, Mr. Love.
    [The prepared statement of Mr. Love follows:]

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    Mr. Burton. Mr. Moore.
    Mr. Moore. Thank you, Congressman, for inviting me to 
testify. In keeping with the truth and testimony requirement, I 
would simply say that neither I, nor the CATO Institute, 
receives any government funding, nor are we seeking any.
    When I was putting together my testimony the other day, I 
realized that I sort of--when I was writing this testimony, 
that I sounded like a shell for the drug industry. And I just 
wanted to also tell you that I receive no money from the drug 
industry; although the CATO Institute gets some, we get very 
little, although we would like to get more.
    The first paragraph of the testimony that I put together 
has been, unfortunately, proven true by this testimony--by this 
hearing. I should say that I am really profoundly demoralized 
by just about everything that I have heard so far today in this 
testimony, because, you know, the lesson we learn--I'm an 
economist, and the one thing that we know is that when it comes 
to the medical industry, we throw out every principle of good 
economics that we know works in every other industry. And its 
this paradox about why we throw out all of those principles 
that we know work in every other sector. And so when it comes 
to health care, you know, what are we talking about doing? We 
are talking about price controls. Well, we know from history 
that price controls have never worked. We are talking about 
creating this huge new, expensive open-ended entitlement 
sometime maybe even later this week in the House of 
Representatives. We know that's what's bankrupted our country 
and created these huge deficits on our grandchildren. We know 
that free markets work and command and control systems don't. 
And yet everything that--every direction that this hearing is 
headed in is toward these dysfunctional policies.
    Let me just make a couple of provocative statements in 
response, and I will just put my testimony in the record, if I 
could, and say--and this is maybe the most provocative thing of 
all: Prescription drugs are not expensive. They are cheap.
    Now, I know probably everybody's in this room's jaw drops 
when I say that. But when you look at the drugs that we pay for 
and the incredible technological boom that we have seen in this 
industry, even drawing from your own testimony, Mr. Chairman, 
where you list these various drugs and how much they cost and 
how much you can get them for in Canada. And I was thinking, my 
God, just think back 30 years ago and we said, my God, you can 
get an ulcer drug that can relieve you from the pain and 
suffering from ulcers for $105. People would say, my God, that 
is incredible, or heart disease. Most of these drugs that you 
are talking about on this list deal with heart disease, they 
are in the hundred dollar range. Its a miracle. It's a miracle 
that you can get these drugs today that didn't even exist 40 
years ago for $100.
    Now, let me just give you one sort of personal example. My 
sister has a child who has epilepsy. Epilepsy is unfortunately 
one of these diseases that we don't have good drugs for yet, 
although sometime in the next 10 to 20 years those drugs will 
be developed. If you told my sister that we had a new drug for 
epilepsy for her 4-year-old and it cost $10,000, she would say 
this is the greatest bargain that she could ever imagine. She 
would pay that $10,000. She would pay $50,000 for that drug. 
And so we have to remember that the prices that we are paying 
for these incredible life-saving drugs are cheap, not 
expensive.
    The third thing I would say is that it is a good thing, it 
is not a bad thing, that our drug industry is so profitable. 
Next week, I am going to be testifying before another committee 
about why the steel industry is not so profitable or why we are 
losing money in the telecommunications industry. This is an 
industry that we should be celebrating that is making so much 
money. And, in fact, that is good for the workers in the 
industry, it is good for all of us who are shareholders in the 
drug industry. So, again, it is sort of this upside down 
thinking that somehow because the drug industry is making a lot 
of money, that's a bad thing. It's a very good thing, and, in 
fact, one of the reasons, unfortunately, that this industry has 
to spend $150 lobbying every year, unfortunately, is because 
this industry is almost under daily assault from Congress 
trying to deplete its profits, I think, very unfairly.
    A fourth point that I would like to make is that government 
has caused the high-price spiral in health care. We know this. 
You know, everybody--and, again, I'm an economist. I talk a lot 
to investment groups. And when I talk to investor groups, they 
are always talking about the fear of deflation. You have all 
heard about, you know, the specter of inflation out there on 
the economy. And I always tell people, you know what? There's 
two industries where deflation is not a problem right now. And 
you probably know what those two industries are: Health care 
and education. And what is it about these two industries that 
cause spiraling cost increases, not the virtuous cycle of lower 
prices? And the answer to that, of course, is government. 
Government plays this very pervasive presence in the industry 
which causes prices to rise.
    Now, this is not just speculation on my part, it's not just 
free market theory. If you look at some of the graphs I 
provided in my testimony, Congressmen, you will see, for 
example, that it wasn't until Medicare and Medicaid were 
created that we saw the very rapid rises in the cost of health 
care. Prior to Medicare and Medicaid, which was the big 
infusion of government interference in health care, prices in 
health care did not rise faster than other industries. Once we 
had this heavy presence of government in the industry, costs of 
health care exploded. So right you have health care costs 
rising at two to three to four times the rate of inflation of 
other goods and services.
    Now, I say that because it points out the real idiocy of 
the idea of saying, well, gee, if we have the government now 
get heavily involved in the area of drugs and we impose price 
controls, that somehow that's going to stop higher prices. In 
fact, we know from the past that government interference is 
what causes the higher prices in health care.
    The fifth and last point is that you have all said that you 
are not for--well, most of you have said you are not for price 
controls. But in truth you are. You are just using different 
terms. For example, when you, Congressman Gutknecht, were 
talking about parallel pricing, parallel pricing is price 
control, it's just a fancier term of describing it. If Canada 
has a price control--and of course Canada does have price 
control on drugs. And then we say, well, we are not going to 
impose price controls here, we are just going to go let people 
buy drugs in Canada, we are simply piggybacking off of their 
price control system. So it's a de facto price control system 
that you're talking about.
    So, we shouldn't mince words. What we are all talking about 
is imposing price controls on the industry.
    And my final point is--because I see my time is up--is that 
price controls, I think, would be a total catastrophe. A lot of 
what has been talked about, I think, so far in this hearing is 
really what I would describe as free lunch economics. And the 
one thing that Milton Friedman has taught me over the years is 
there is no such thing as a free lunch.
    Look, if you create this new prescription drug benefit, you 
are going to see exploding costs on the backs of taxpayers. 
There is no question about that. And the only way you could 
possibly prevent that would be to do something to control--to 
cap the price of drugs. If you do that, you are talking about 
price controls.
    Now, what is the impact of price controls? If you take--
price controls mean that companies in the industry are going to 
make less profits. And if companies make less profits--and this 
is where I think I would disagree with just about everybody in 
this room--there is just no argument in my mind that the 
venture capitalists who put up the funds for these exciting 
life-saving new drugs of the future will not invest as much. 
And that will lead to the delay of all of these exciting new 
drugs that are going to come on the line in the next 25 or 30 
years. And if that happens, you will be doing a profound 
disservice to future generations because these drugs have such 
a wonderful opportunity of making life on Earth better.
    Thank you.
    Mr. Burton. Mr. Moore, I'm sure we are going to have a lot 
of questions for you.
    [The prepared statement of Mr. Moore follows:]

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    Mr. Burton. Mr. Vaughan.
    Mr. Vaughan. Thank you, Mr. Chairman. And thank you for 
inviting Families USA to testify.
    I think in the last year we got a $100,000 grant from HRSA 
for some work on presumptive enrollment of children in SCHP.
    We get no drug money, and we want no drug money, and we 
tend to lobby for an America in which every family would have 
$50,000 to be able to spend on drugs. But until that happy day 
occurs, we try to work for better drug prices, and we do seek 
ways to encourage research.
    We have issued numerous reports over the past decades on 
the pharmaceutical industry. Our next report will be out on 
July 7th. And the doctor here is helping us with the data. It's 
going to be on the 50 prescription drugs most used by seniors, 
and we don't have the final hard numbers yet, but I think you 
won't be shocked that those prices are going up much higher, 
much higher than CPI. And it once again shows why so many 
seniors are crying for help.
    Your hearing, sir, is extremely timely, because it is 
absolutely certain that Congress will be back visiting this 
issue time and time again. And the question will always be 
coming up, can we get a better price for the pills we buy 
without killing the golden goose of research? And Families USA 
thinks we can.
    Why do Americans pay higher retail prices than Canadians 
and Europeans? Page 2 of our written testimony goes into that 
at some length. But, basically, everything in the health sector 
is higher in the United States. It's not just drugs that we are 
a bad buyer on. And the solution won't be easy until we really 
change our approach in a number of areas. But in the meantime, 
it's not surprising that societies that do control their prices 
better than we do have caused the drug companies to charge our 
citizens more. We are in a sense paying for their successes.
    So, what can we do immediately? In the Medicare 
Prescription Drug Bill that is going to conference, you can 
make some major short-term savings, we think. One, we believe 
the best way to get a better price is to use the clout of large 
buyers. Just like Wal-Mart gets a better price from suppliers 
than smaller companies, so can Medicare, Medicaid, and the VA. 
I think you should all be very proud of the price our veterans 
are getting. And, through the conference, we hope that you will 
try to support Medicare through its contractors, not directly, 
but through its contractors being an aggressive buyer.
    Second, we hope the House Medicare conferees will accept 
the Gregg-Schumer Generic Amendment that was approved 94 to 1 
in the Senate. This bill is estimated to save Americans about 
$60 billion over the next decade. We have all seen 
documentation of the abuses of the brand name companies 
blocking the generics getting to market. FDA has issued some 
regs that are a little bit better than current practice, but 
not nearly as strong as Gregg-Schumer, and we hope the 
conferees would take that.
    Third, we very strongly support Congressman Allen's and the 
bill you have cosponsored, sir, H.R. 2356 that would really do 
some decent, good research on the comparative effectiveness of 
drugs. We shouldn't have to be buying me two products. We ought 
to know which one's good and go for that one. And, 
congratulations. I see the Post endorsed that this morning, 
that approach. We hope it can be added to the Medicare bill.
    Fourth, there is at long, long last a chance to end the 
average wholesale price, really, loophole or abuse that's been 
occurring out there. We urge the conferees to take the AWP 
solution that CBO says is the best; the two Chambers have very 
different approaches. We urge you not to forget that some of 
the worst AWP abuse occurs in the kidney disease program. And 
please don't leave them out of that reform.
    And finally, and not least, we hope the House will support 
free trade in pharmaceuticals with Canada and other nations 
with good quality control such as your bill, sir.
    What can be done in the long run to get better prices 
without price controls was the committee's letter to me. And we 
understand the reluctance to talk about price controls, because 
the pharmaceutical industry has done really a brilliant job of 
saying that if you even frown at them, their profits will 
disappear, and they are not going to cure death, and that you 
are going to kill your constituents. And that is very hard for 
any elected official to deal with. And we would urge you to 
reverse that argument, that the American pharmaceutical 
industry with these incredible profits, with these 
unprecedented profits, doesn't do enough research. That every 
time they spend money on some of those lobbyists over there 
that your staff has put up, that's a dollar not being spent on 
research; that every time they spend more on advertising and 
overhead than they do on their R&D, they should be ashamed. And 
you should push back on this because no other industry when 
their profits are down says, oh my gosh, we are going to hold 
our breath, not invent a new product, and it's just terrible. 
This is not the way businesses work in the rest of our economy.
    On the last page and a half of our testimony, we walk 
through a variety of ways that you might get some cost 
containment without, we think, price controls and that would 
actually use Medicare's buying power to try to create new 
product. We suggest some ways to recoup some of the investment 
that the public has put into the R&D. There is old ideas like 
the old Renegotiation Board from World War II and the Korean 
War that recaptured excess profits that were partly supported 
by the government. And we would urge you to consider some 
possible long-term contract negotiations where we will get a 
better price and are guaranteed to buy your product for a long 
period of time.
    So there are ways to jujitsu or end run this, if you 
question us, we won't do any more research. And we congratulate 
you on taking on this tough issue, and wish you good luck.
    And before I quit, sir. On the exchange of information, I 
have heard--and I don't think it's changed--that within CMS, 
Medicare and Medicaid, the Medicaid best price number cannot be 
told to the people in Medicare when they pay on Part B, 
outpatient drugs. So, within a single agency of HHS, they can't 
talk to each other. So you can add that to your list of 
information requests.
    Thank you very much.
    [The prepared statement of Mr. Vaughan follows:]

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    Mr. Burton. Thank you, Mr. Vaughan.
    Mr. Schondelmeyer.
    Mr. Schondelmeyer. Good afternoon, Mr. Chairman, and 
committee members, especially my Congressman from Minnesota, 
Mr. Gutknecht. Thank you for your kind words earlier.
    I was asked rather last minute to come testify, and I did 
rearrange the schedule, and am glad that I was able to be here. 
I will submit a statement after today. I did provide you with a 
set of charts that show some data and information that I will 
try to highlight today.
    First of all, let me remind us that the Center for Medicare 
and Medicaid Services Office of the Actuary estimates that we 
spent about $161 billion on prescription drugs last year. I see 
that number often quoted. And that is about 10 percent plus or 
minus of our total national health care expenditures. And I see 
a lot of people quote this number. And while I believe the 
estimate by the Office of the Actuary to be a very reasonable 
and accurate estimate, most people don't understand what it's 
estimating and misuse the information. They claim that's the 
total amount we spend on prescription drugs in America every 
year. Not true. What CMS and the Office of Actuary say that 
number represents is the amount spent on retail or outpatient 
prescription drugs every year. That number doesn't include the 
amount spent on drugs in the hospital, the drugs paid for in 
the hospital or in the hospital sector of their estimates. And 
they estimate that very well. Drugs paid for or used in 
physicians offices, for example, under Medicare Part B would 
show up in clinics or physicians office expenditures, drugs 
that are paid for by the military would show up in a different 
sector of the Federal national health expenditure estimates.
    I attempted to do an estimate, accrued estimate of how much 
we totally spend on drugs every year in the United States, and 
instead of being $161 billion last year, I would estimate it to 
be more in the order of about $280 billion. So instead of being 
approximately 10 plus or minus percent of our national health 
expenditures, it's really about 18 percent of our national 
health expenditures, a much larger number. And I have worked 
with, been in discussions with folks at the Office of the 
Actuary about my development of these numbers, and they don't 
disagree at all that--again, they accurately estimated what 
they claim to estimate, but most people in literature and in 
testimony and in many other places misuse or misquote that 
number.
    I raise that to start with to say that there are a lot of 
misperceptions and misunderstandings in this, what we call a 
pharmaceutical marketplace. I believe in free markets also. And 
I believe in economics, but I think pharmaceuticals is a 
marketplace that has structural barriers and structural 
problems that don't allow a free market to work in a normal way 
that we would expect. In fact, a couple of years ago, two 
American economists, two or three American economists got the 
Nobel Prize in economics for describing what we call asymmetric 
markets. They focused on the market for lemons, which is 
another euphemism for used cars. But I would argue they could 
have just as easily done their analysis on the market for 
pharmaceuticals, because it's a very asymmetric market.
    What do we mean by an asymmetric market? It means that the 
seller has a whole lot of information and the buyers have 
virtually none. And the way we have structured our market, just 
from your discussion earlier, every transaction price level 
that occurs tries to hide and keep their price away from buyers 
in the marketplace. And everything I remember from economics 
says that price information helps the market work better. And 
our goal is to achieve a reasonable price in the marketplace 
and an equilibrium price that balances the interest of all 
parties in the marketplace. I don't see that happening. I would 
disagree with my colleague Mr. Moore that disaster will come if 
the government takes some actions to try to regulate the 
market. Not necessarily price control, but just to make the 
market work more like an economic market. I would argue that 
disaster is already occurring, has been occurring for more than 
a decade in this marketplace where we have people who can't get 
medicines that they need and they are trying to give price 
feedback to the pharmaceutical industry.
    Why do we have people going to Canada to buy drugs at a 
lower price? Because they are concerned about the high price of 
drugs, and they are trying to make a market work, but the 
marketplace and the structure of the market won't allow it to 
work.
    So, I would argue that we need to understand, 
pharmaceuticals are different. I think pharmaceuticals are--I 
agree with you on one point: Pharmaceuticals are absolutely 
essential to us as a society. Every citizen has used, will use, 
or should use prescription drugs in their lifetime. When I go 
talk to audiences, I ask, is there anybody here who has never 
been sick a day in their life? And nobody with a straight face 
can raise their hand. And I ask, is there anybody here who has 
never taken a prescription drug in your life? Occasionally, I 
will have somebody raise their hand who for personal reasons 
may not have ever used a prescription drug. But I would argue, 
there is no one in our society, America, or the world, who 
doesn't need or won't during their lifetime, need a 
prescription drug and the valuable drugs that we do have 
available. But most people have difficulty obtaining them 
because of the cost.
    I would argue even Allen Homer, the CEO for PhRMA, has 
acknowledged this. He in a statement in the pink sheet back in 
November 2002 commented that pharmaceuticals are viewed as a 
necessity. Patients cannot object to what they view as high 
prices by just restraining from purchasing the product. If I 
was that epileptic patient that we talked about earlier and 
let's say one of you was a diabetic patient, and I found out 
that your drug was cheaper than mine, I couldn't go start 
buying your drug to treat my epilepsy because it was cheaper. 
So we have to view the economics of this marketplace for 
pharmaceuticals not in terms of the industry and concentration 
of one drug company versus another, but in terms of 
concentration in a given disease state. Only within epilepsy 
can you talk about the concentration of the market. Only within 
diabetes can you talk about the concentration of the market. 
Any study that argues that this industry is not concentrated 
based on industry-wide statistics I would argue has no real 
validity in terms of actual consumer behavior because there is 
no cross elasticity between diabetic drugs and epileptic drugs 
as far as I know.
    Let me give you some examples of price increases and 
changes. And I would comment, again, with all due respect to 
the comments that have been made previously even by some of the 
committee members, we often misspeak and say that prescription 
drug prices have gone up 16 and 17 percent in the last several 
years. That is not accurate. Prescription expenditures went up 
16 or 17 percent. Prices though have gone up, about a third of 
that is--a lot of that is utilization. And the industry reminds 
us of that and that's true. But they argue that prices are a 
small part of that. Well, let me tell you how small of a part 
prices are of that.
    First of all, I looked at some major drugs, some of the 
most prescribed drugs in the country and their price in January 
2003 versus January the previous year.
    Let's start with Celebrex, a drug to treat pain of 
arthritis. It went up 6.9 percent. And I would remind you in 
the last year--this is the first of your charts. It went up 6.9 
percent. I would remind you that the Consumer Price Index, less 
energy, last year went up about 1.8 percent. So, you know, with 
price increases like that, it's enough to cause you pain rather 
than to solve your pain.
    Second, cholesterol drugs are in the news a lot lately, on 
TV ads a lot lately. Zocor and Pravachol both went up about 10 
to 11 percent. That's 10 or 11 percent on a 1-year change in 
price of 10 or 11 percent. Now, do you think most of your 
constituents had a 10 percent increase in income last year? Did 
you have a 10 percent increase in income last year?
    Mr. Burton. You must be joking.
    Mr. Schondelmeyer. I am, yes. That means this takes a 
bigger bite out of the wallet of those paying for these drugs.
    Let's look at diabetes. Humulin, insulin went up 10.2 
percent. Glucotrol XL, an oral antidiabetic went up 12.7 
percent. But let's look over at the other--these are some, but 
they're--like they say on TV, but wait, there are more. 
Claritin went up 21.1 percent last year; 21 percent increase. 
Now, it went over-the-counter in December, and that may help a 
little bit with the price, although it hasn't totally. But then 
beyond that is Ultram, another drug to treat pain of arthritis, 
it went up 24.9 percent last year. Why?
    And, finally, Axid, a drug to treat ulcers, went up 26.3 
percent and that's enough to give you ulcers.
    Why do we see these dramatic price increases? I work with a 
group in Pennsylvania, the Pace Program, one of the oldest and 
probably best run programs to provide prescription drugs for 
elderly in the United States. A fellow name Tom Sneddon runs 
that program and has done so for more than 15 years. And every 
year I get from him the top 50 drugs prescribed for the elderly 
in Pennsylvania, and I calculate then a weighted average price 
increase of those top 50 drugs used by the elderly. And this is 
figure seven in the charts that you have before you.
    What we found was in the year 2000, those top 50 drugs went 
up 2.5 percent in price. And this is price, not expenditure 
increase. In 2001, they went up 5.4 percent. In 2002, they went 
up 7.2 percent. And last year, between last year and January of 
this year, they went up about 6 percent.
    Now, let me put those numbers in a different perspective, 
and that's really on figure. I calculated the price increase of 
these drugs used by the elderly as a ratio compared to the 
Consumer Price Index, less energy. And what we see in 2000, the 
price increase was about 1.2 times the overall CPI, less 
energy. In 2001, it was double. The price of drugs for the 
elderly was double the price increase of the CPI. In 2002, it 
was 2.8 times. And last year it went up 3.4 times the overall 
inflation index.
    Again, what's going on in this industry? Have the costs to 
the pharmaceutical industry gone up that much? No. I don't 
think so. I think it's taking advantage of the price they can 
charge in the market, and also the industry recognizing maybe 
we are about to pass coverage of prescription drugs under 
Medicare, and let's get all the price increases we can now, 
before the government starts paying for them all because it's 
likely to cut my prices. We saw this phenomenon back when the 
Medicaid Rebate Law was passed, and I think this pattern is a 
part of that explanation. So we see an industry preparing for 
what they think might come in the next 24 to 48 hours or 2 to 3 
weeks or whenever you get around to it.
    And I encourage, I think we need to deal with the issue of 
coverage of prescription drugs for the Nation's elderly in the 
United States. I am not at all arguing we should not do that, 
but we do need to be careful how we do it.
    I think it is also useful to look at prescription drugs and 
the prices that we pay, and the cost per day of therapy for 
drug for the elderly for brand-name drugs from this 
Pennsylvania program was $4.10 per day of therapy. That's 
figure 5 of the charts I gave you. The average generic cost is 
only 98 cents per day of therapy, a difference of four to one. 
And yet we find the private marketplace, the PBMs and the mail-
order plans that are supposedly going to bring us more value 
and save us more money and the Medicare program have the lowest 
generic use rates. The highest generic use rates come among the 
elderly who pay cash out of pocket and among the Medicaid 
program. But when you look at the private, third-party 
insurers, they don't have as high of a generic-fill rate as our 
Medicaid program or the cash-pay customers do. And when you 
look at mail-order, they have the lowest generic-fill rate and 
generic-dispensing rate of any sector in the pharmaceutical 
distribution marketplace.
    Why do we see strange behaviors like this? I would argue 
it's in part because of what I would call reverse perverse 
economics. Again, I believe in economics, and they work. But if 
we understand them, we can see why we have some strange 
anomalies in the pharmaceutical marketplace. We have had at 
least three pharmaceutical companies come to settlements with 
the Department of Justice agreeing to pricing issues with the 
government and the Medicare program. TAP Pharmaceuticals, Bayer 
pharmaceuticals, and then most recently was the settlement that 
was just announced in the last week or two, Astrazeneca. And in 
each of these cases, this was a case where the drug companies 
had figured out that, if I charge a higher price and give the 
same or greater discount, the doctor makes more money when they 
prescribe higher-priced drugs. And so when doctors make more 
money when they prescribe higher-priced drugs, which drug do 
you think gets prescribed more often, the lower-cost drug or 
the higher-cost drugs? The higher-cost drug. That is a reverse 
perverse economic market. We need to fix reverse perverse 
economic markets, and we need not to create another one in the 
design of the Medicare outpatient prescription drug benefit, 
however it's structured. We need to be very careful not to 
create that problem all over again.
    All of this then gets back to prices in the United States 
versus other countries and Canada in particular and 
reimportation. I find it amusing the dialog that has gone on 
about how dangerous it would be to have reimportation of 
American-made drugs back from Canada, the same drugs made by 
the same pharmaceutical company in Puerto Rico shipped up to 
Canada and then we can't bring them back. First of all, there 
is--I think I brought with me. The industry has sponsored and 
there is a group called Reconnaissance International. It has 
written a book on protecting medicines and pharmaceuticals. 
It's all about counterfeits throughout the world and issues on 
counterfeits. And one of the points they make in here is that 
in the pharmaceutical or in the marketplace--I don't see it 
right in front of me. Let me paraphrase it. Basically, higher 
prices are what create the opportunity for counterfeits. That 
we only have counterfeits when there are either high prices or 
high-priced differentials between two markets. When that 
occurs, then we have an opportunity for counterfeit. So it's 
the higher prices, stupid, that are creating the opportunity 
for counterfeits, not reimportation. And, in fact, we have 
counterfeits that we have been told by the industry already 
exist in the U.S. marketplace even with the FDA's assurances 
that we are safe and they are already in the U.S. market. I'm 
not aware of any of the counterfeits that have occurred in the 
U.S. market coming through channels through Canada. They come 
from Belize, they have come from Mexico, they come from other 
places, but I am not aware of any from Canada. I haven't seen 
any publicly reported that way. So I have to ask, you know, 
what are we doing? And particularly, I would ask the FDA, 
explain exactly what level of safety it is that you are 
requiring before you will sign off on reimports from Canada. I 
would argue if the FDA required the same level of safety in 
approving the new drugs they evaluate every year, that they're 
holding Canada reimports to, we wouldn't ever approve any new 
drugs. There is much more risk by the drugs approved by FDA 
each year than there is from allowing reimports from Canada. 
Now, I am not saying don't approve new drugs. I think we have 
to as a society and you have to as policymakers and FDA has to, 
as administrators of that policy, make risk/benefit decisions. 
They need to do so wisely and informedly. But from all that I 
see, the evidence, the information in the marketplace, 
reimports from Canada have far less risk than approval of 
almost any new drug I saw approved last year. So, let's put in 
perspective the risks and benefits that we are creating.
    With that, I thank you for your time and attention. I am 
sure we all would welcome questions.
    Mr. Burton. Wow.
    Mr. Moore, you have a little old lady who is 85 years old. 
She lives in Minnesota. She has to buy Tomoxofin or some other 
cancer drug. She knows if she drives 50 miles across the 
Canadian border, she can buy it for one-fourth of what it costs 
in the United States. Why shouldn't she?
    Mr. Moore. Well, I mean, the problem is that if everyone 
does that, you know, you are going to drive down the--you are 
to dramatically drive down the profitability of the industry. 
When you drive down--this is the whole point I was making, that 
there is no free lunch here. If we, basically, piggyback off 
the Canadian price control system, you will, basically, drive 
down dramatically the profits of the industry. The venture 
capital industry, and the people that I work with are in the 
venture capital industry, they aren't going to invest. And I 
don't care how many people tell me that if you take the profit 
out of the industry, they are still going to invest.
    Mr. Burton. No. We've had people from the industry before 
the committee, and they admit that they make a profit in 
Canada. The profit is much smaller than they make in the United 
States but, yes, they make a profit. I have a friend that I 
play golf with, he has a number of problems, diabetes and high 
blood pressure and I think some heart trouble. He was paying 
$1,300 for a 30 or 60-day supply of all the drugs he needed, 
which was a lot. He bought a 90-day supply for one-third the 
cost. So he got 50 percent more, as far as days covered, for a 
heck of a lot less. The companies are making a profit in 
Canada. They told us that. Why shouldn't he buy his products in 
Canada?
    Mr. Moore. Well, it's sort of like saying, I mean, to think 
of an analogy. Think of the way that, let's say, airlines 
price. You know, where they have first class and then they have 
people who buy tickets at full price and tickets that, you 
know, if you buy them 6 months in advance and you go over a 
Saturday night and so on, you can buy the ticket round-trip 
from here to Chicago for $149. And you say, well, why can't 
everybody get the ticket for $149? I mean, that's sort of, you 
know, what you are saying. And I think what's going on here is 
very much of a sort of cross subsidy time of system.
    So what I am saying, though, is we just have to get around 
this idea that by imposing price controls--and by the way, Mr. 
Chairman, I am such a big fan of yours. And if I've sounded, 
you know, at all belligerent about this, it's just because I 
like, Congresswoman Watson, feel very passionately about this 
issue.
    Mr. Burton. Well, let me interrupt you just to say that 
Milton Friedman is one of my heros, and I am one of the right-
wingers in the Congress.
    Mr. Moore. I know you are. That's why I am so disappointed 
that you are so wrong-headed on this particular issue.
    Mr. Burton. Well, you are disappointed that I am so wrong-
headed----
    Mr. Moore. On this issue, because you are right on 
everything else. But price controls--you know, when I first 
worked for Reagan, you know, people forget. The first--very 
first thing Reagan did when he was elected President, on the 
very first day, do you know what it was?
    Mr. Burton. Got rid of price control.
    Mr. Moore. He lifted price controls on energy and natural 
gas. And, boom, the energy crisis was over. So why do we keep 
thinking that price controls are the solution?
    Mr. Burton. Well, I think the problem is--and I am going to 
let Dr. Schondelmeyer respond to this because he is antsy over 
there, I can see him squirming around in his seat. You are 
comparing eggs with grapefruits. While I'm for the free 
enterprise system and the free markets, I don't think that 
people should be raped and get--because a company that controls 
a certain product can rip off the people because that's the 
only product they can get to survive. You know, my wife died of 
cancer a year ago, and she had to have some of these drugs that 
are very, very important that are under patent. They could have 
charged $20,000 for those, and if I could afford it, I would 
have bought them. But at the same time, those same 
pharmaceutical products could be purchased in Europe and Canada 
and elsewhere for a lot less. And people who are terminally ill 
or who may be terminally ill, they shouldn't be denied those 
products simply because they live in the United States and 
can't afford them.
    Mr. Moore. And my point is that if we have it your way, 
those lifesaving products might not exist. And that's what I 
really find very troubling about--not that they might not 
exist, but that you are going to delay the introduction of 
them. And if you do that, that does a lot of damage. I mean, 
when Dr. Schondelmeyer said that--you know, with all due 
respect, that there is something different about the 
prescription drug benefit than other industries, you know, it's 
this sort of, I believe in free markets, but with all due 
respect, Doctor, I've heard that about every single industry 
that has an interest in Washington. We are different; it's the 
agriculture industry that's different or the steel industries 
that's different or the automobile industry that's different. 
And it's not actually what's causing the very price increases 
that you have talked about with respect to drugs and medical 
prices has precisely been the third-party payer system that the 
government's set up.
    Mr. Burton. Let me interrupt you just to say, you are not 
for the prescription drug bill?
    Mr. Moore. No.
    Mr. Burton. And you were not for Medicare.
    Mr. Moore. I think Medicare has really screwed up the 
health care system.
    Mr. Burton. And you weren't for Medicaid.
    Mr. Moore. Right.
    Mr. Burton. OK. I want to tell you a story. When I was a 
State senator in 1969, and I know I look a lot younger, but 
when I was a State senator in 1969, the Federal Government came 
into Indiana and said, ``if you don't take Medicaid, we are 
going to withdraw $2.5 million in Federal highway funds.''
    We had at that time a township trustee system that worked 
very well. If a person was indigent and needed medical care, 
they would go to the township trustee. He would say, tell me 
what your problem is, and he would take money out of the 
township trustee fund and he would pay for their medical bills. 
Costs were much less. When my kids were born, $24.50 a day for 
a semiprivate room. So, you know, prices were a lot less.
    I went to the floor of the senate and I said, ``Hey, we 
ought to tell them to take this $2.5 million and put it 
someplace where the sun doesn't shine, because it is going to 
cost 10 times that much if we take Medicaid.''
    Mr. Moore. And you were right.
    Mr. Burton. Do you know how much Medicaid costs in Indiana 
today?
    Mr. Moore. It is bankrupting the State.
    Mr. Burton. $1 billion. I was so far off, it wasn't funny. 
So I agree with you. I agree with you. But when you are talking 
about prescription drug companies that are subsidized in large 
part by the Federal Government, they manufacture a product that 
people depend on for life, and they charge an exorbitant price 
in the United States because they say they want to make up for 
their R&D here, while they are selling it for a very small 
profit someplace else, where they say they are not making up 
for R&D, then I just think that is wrong.
    If they can prove to me that they have to have that money 
for R&D, then it ought to be spread over everybody, not just 
the United States of America.
    Mr. Schondelmeyer, you have heard some of this. Do you want 
to make some comments on what Mr. Moore said? Don't hit each 
other.
    Mr. Schondelmeyer. I will try to keep my comments focused 
here. First of all, I would comment while R&D may be necessary 
to bring new medicines to the market, it is not sufficient to 
bring them to the market or bring to patients in a way that 
treats them and they get better.
    One phrase I often like to use is the phrase that a drug 
that one cannot afford is neither safe nor effective. It 
doesn't matter how it was discovered, it doesn't matter how 
much was spent on clinical trials or how much the government 
looked at it and evaluated it. If I can't afford the drug 
sitting on the shelf in that pharmacy, I am not going to get 
better, and my epilepsy won't get better.
    And we have a society where we have a lot of people who 
can't afford drugs they need. Something is broken in the 
overall economy, and we need to find ways to fix that.
    I am open to any--market mechanisms, price control 
mechanisms. I am open to any mechanism you can show me that 
will solve that, but I haven't seen either of them solve it 
yet. We haven't made much progress; in fact, we have kind of 
backtracked some.
    Next I would like to comment that not all of the new drugs 
that are--the companies that make application to the FDA to 
have a new drug brought on the market each year, a third to a 
half, and in some cases more than a half of those drugs weren't 
ever discovered by the company that applies for the new drug 
application. They were discovered by another company, a company 
in Japan or Europe, or by a university researcher or by NIH 
research, and the drug company just buys the license, like we 
saw Bristol-Myers do with Taxol.
    Mr. Moore. So what?
    Mr. Schondelmeyer. Well, they didn't discover them. The 
drug company didn't spend the money on the R&D.
    Mr. Moore. And the company that did pay for the R&D was the 
company----
    Mr. Burton. Let's let Mr. Schondelmeyer proceed.
    Mr. Schondelmeyer. Well, but that story gets told. For 
example, we heard about AIDS drugs. A colleague of mine at the 
University of Minnesota, Dr. Robert Vince, discovered Ziotin, a 
new AIDS therapy. He discovered this drug back in 1986-1987. 
The university licensed the patent out to, at the time, 
Burroughs Wellcome. Burroughs Wellcome examined it, kind of sat 
on it, had a couple of other AIDS drugs in the pipeline. Then 
they were bought out by GlaxoSmithKline. GlaxoSmithKline had 
some other AIDS drugs, and they sat on it.
    This drug then, they didn't really develop it until the mid 
to late nineties. And then when they did develop it and applied 
to FDA, FDA approved it in 4 months. So this wasn't the 
government that delayed bringing this product to the market. It 
wasn't the university's research that delayed bringing it to 
the market. It was the drug companies sitting on it for a 
decade before they brought it to the marketplace, because they 
had other AIDS drugs and they wanted to play them out first.
    Then, GlaxoSmithKline had the audacity, when they were 
ready to come to market, to send a letter to the university, 
``By the way, we are going to make this product in England and 
we don't believe we owe you any royalties on that patent 
agreement.''
    Well, the university didn't agree with them, and they filed 
suit and eventually arrived at a settlement.
    Is this a market? Again, something is broken in that market 
that needs to be addressed or fixed, and we have new 
discoveries that are valuable to us that they sit on for 10 
years in the marketplace, when we have patients who need those 
AIDS medications.
    Mr. Burton. Ms. Watson.
    Ms. Watson. We have a severe problem as we try to address 
providing programs to our seniors. Our seniors are living 
longer, and the reason why they are living longer is because 
there are now medications that assist them. So, in order to 
provide a safety net--and that is our responsibility--we are 
going to have to be able to lower the cost of the 
pharmaceuticals that they depend on for their very lives and 
the quality of their lives.
    Not for a minute do I feel that we are going to provide the 
disincentives that drug industries feel are going to drive them 
out of manufacturing. I don't think that for a minute, because 
they have paid time and time again and recouped the money on 
developing aspirin.
    So, what we need to get from the panel is how do we provide 
the benefit for our seniors who have paid their dues, they 
worked, and now they are on a fixed income; and in these United 
States there are drugs, and I want to thank the gentleman who 
brought this chart in, and maybe----
    Mr. Gutknecht. No, that is actually my chart.
    Ms. Watson. Oh, your chart. I mean, this is astounding. 
This is astounding. We share two borders, the northern border 
with Canada, the southern border with Mexico, and I have been 
told by my constituents--I represent Los Angeles--that they get 
in the car, they drive 2 hours, they go over to Mexico, and 
they get their lifesaving drugs, because the costs are so 
different.
    Now, Mr. Moore, I want you to help me understand why you 
don't consider giving a break to seniors a good move for 
business when--if those seniors can consistently live longer 
and consistently buy those drugs, there is going to be profit, 
because, you see, once you do your R&D and you produce these 
drugs, the cost of a single pill is just nominal.
    Can you help us with trying to work through the challenges 
of providing a safety net for our seniors whose fixed incomes 
might be $800 a month and they have to pay $360 for Tamoxifen 
here, and they can get it for $60 in Germany--this is the 
Munich airport?
    Can you help us with that?
    Mr. Moore. Well, just a couple of points. One is don't 
forget for every profitable drug like the ones you have 
mentioned, there are dozens, scores, hundreds of drugs that 
fail, that don't make it to the market. So the ones that you 
are talking about that are very profitable are subsidizing the 
ones that are failures.
    Ms. Watson. These are the ones I am talking about. I am not 
talking about the others.
    Mr. Moore. No. But I am saying that the reason there is so 
much profit in these drugs that you are talking about is 
because only one in maybe--you probably know the numbers better 
than I do--but 1 in 20 or 50 or 100 of the drugs that these 
companies are working on ever make it to the markets. So that 
drug has to subsidize all the research that is being done on 
other less successful or never successful drugs.
    Let me suggest--actually, I do have an idea about how you 
could do this prescription drug benefit that actually maybe 
Democrats would like more than Republicans.
    Ms. Watson. We are open.
    Mr. Moore. You ought to just loan the money to seniors, and 
then when they die, you know--why should the taxpayers pay for 
this--take the money out of their estate.
    Ms. Watson. Oh, please, Mr. Chairman. Let me respond to 
that. I will invite you to come to my district. I represent 
650,000, just like my colleagues do, and I want to tell you the 
range of income goes from zero-minus up to the top of the 
scale.
    Mr. Moore. Right.
    Ms. Watson. The people who qualify for these programs are 
the ones who are at the bottom of the scale, and their needs 
are greater, because I find within the communities that I 
represent, the poor people come into the system when they are 
more acutely ill, and they have various conditions that the 
traditional provider understands and will prescribe a drug that 
will get to that condition. There are a lot of ethnic 
minorities.
    So an estate, what are you talking about?
    Mr. Moore. No, for those who do have estates. You are 
right, there are many, many low-income seniors who have no 
estate.
    Ms. Watson. Would you believe millions?
    Mr. Moore. Millions. But you know what, seniors have the 
highest rate of home ownership, for example. Why should the 
heirs get the home rather than the taxpayers who paid for the 
drug?
    Ms. Watson. You are getting off into something else. Let me 
give you some facts. I am dealing with facts every day. I am 
dealing with the people who march into my office, call my 
office, write my office, fax my office. I am not dealing with 
hypotheticals. Forty million uninsured in the United States of 
America. Eight million of those are in California. And 600,000 
of those are probably in my district.
    Now, there is no estate. They can't even pay for their 
burials in many cases.
    Mr. Moore. What about the wealthier? Wouldn't you be in 
favor of the wealthier people who get the benefits coming out 
of their estates? Rather than taxpayers paying for it? I mean, 
I concede your point that there are millions of low-income 
seniors who have no estate, but there are also millions of 
higher or middle-income seniors who do have an estate, and the 
question is who should pay for their drugs. Should it come out 
of their estate or should it come from your children and my 
children? And I would say it should probably come from the 
estate.
    Ms. Watson. I don't even understand how you are defining 
estate. There is no estate. These are people who have been 
living on this fixed income, living on Social Security, maybe a 
little retirement, who cannot afford their drugs.
    Mr. Moore. Yes, but even upper-income people are going to 
derive benefit.
    Ms. Watson. Who get on the bus down to Mexico or Canada to 
help them out. So I don't think your proposal is really 
practical. Can you come up with something else?
    Mr. Moore. That is my idea.
    Ms. Watson. Thank you.
    Mr. Vaughan. I would just urge in terms of the kind of 
constituents you are talking about, to take a good look at the 
Senate bill which does so much a better job for those under 160 
percent of poverty. The House bill, because it doesn't cover 
the low income through the doughnut, is going to be real tough 
for some of our most vulnerable. I hope in conference that some 
way could be found to help with that.
    Ms. Watson. This idea that the wealthy can take care of it, 
but the poor, you got to perish, or we loan something and your 
estate pays, it is not the real world that we are dealing with. 
And as we grapple with this problem, I am hoping that you 
panelists who have been researching and studying this can be 
helpful to us. Because we really are looking for a way to do 
what we need to do, and that is develop a safety net, and 
particularly for our seniors.
    So, anyone else?
    Mr. Love. One of the persons that was invited here today 
was Dr. Tim Hubbard who is in England at the Wellcome Trust. He 
worked with John Salston, who won the Nobel Prize last year. 
Tim and John Salston worked on the human genome project. And 
Tim and I were invited by Aventis last September to meet with 
20 executives of Aventis for 3 days in Strassburg to discuss 
what might happen down the road, because Aventis, a big drug 
company, said they were running into this wall.
    Insurers, governments, are tired of paying this. They don't 
know how sustainable the increases in prices are, and they saw 
the success of the activists on the AIDS movement, they saw the 
human genome project, they saw all these things going on, so 
they are asking themselves--they asked us if our side won, all 
these activists and the open source development guys--what 
would the world look like in 20 years was the question. They 
put that question to them.
    So, what Tim wanted to do was develop a no intellectual 
property scenario, but not a scenario where there was no 
development of new drugs or there was no money. He wanted to 
design a situation that actually increased the amount of money 
that went into research and development, but created a 
different model for development, a different business model for 
development, one where the products were priced at marginal 
costs when they are developed, so whether you were rich or 
poor, you bought them at manufacturing costs, but you financed 
the R&D in a different way.
    The system they came up with--it was modeled in the United 
States, and I worked on this--was that it was a tax of between 
$100 and $200--not a tax, but it was an obligation on employers 
to contribute $100 to $200 per year, per person, on a plan into 
an R&D fund, and in return for that, they get all the drugs as 
generics. All the products became a generic. It was about $700 
per year, per capita, in the United States for medicine, so 
that was a big decrease in the price the plans were paying for 
medicine. So they came out ahead of the game, way ahead of the 
game.
    Then the idea was that the firms would then give their 
money to intermediaries. It was a whole system of competitive 
firms who did drug development, but they competed against each 
other and the employers could give the money to the firms they 
thought did the best jobs. So there was a competitive market 
being created for innovation. It was private, profitmaking, you 
know, businesses, competing against each other, decentralized 
decisionmaking, employers funding these R&D entities.
    That replaced the current system. This was a scenario that 
they sort of worked out with Aventis management, and the person 
that worked on it just practically got fired by Aventis 
afterwards because it was considered too provocative 
internally. But it was a radically different approach.
    But I am telling you, if you feel uncomfortable as I did 
when Bristol-Myers asked me to check with somebody who needed a 
cancer drug, Taxol, and find out if the person owned their own 
house and if they had mutual funds, and I said, well, why is it 
that you need to know that? And they said, ``Well, people put 
money away for a rainy day,'' they said, ``and this is that 
rainy day. It is an uninsured cancer patient.''
    So if you are uncomfortable with those situations, as I am, 
and you realize that the ultimate goal of the drug companies is 
to have the net worth of every person who has got a terminal 
disease and basically tell them what the price of the drug is, 
that is sort of the ultimate efficiency of the market. If you 
don't like that and you don't want to fall into this trap of 
just sort of saying look, we need to make new drugs, you have 
to--you are not buying drugs, you are buying research and 
development.
    And if what you do is you say to a company, you go out and 
do stuff, you find something that will save somebody's life, 
and then tell us afterwards what it is going to cost and how 
much you want, and we will see if--you know, it is going to be 
a very uncomfortable situation, a very uncomfortable 
negotiation.
    You are going to have to pay for R&D, but you don't have to 
pay for it the way you do now. And if you continue this way, 
you are going to have a lot of these hearings and you are going 
to be lectured by the Cato Institute about there is no free 
lunch and you have to pay for R&D, and if you decrease the 
profits and have weaker intellectual property rights, there 
will be less money for our U.S. drugs. And that is right, 
because if you stick with the current system, if you just do 
nothing else but weaken the intellectual property rights, you 
will hurt profits.
    The thing is that the current system is an incredibly 
inefficient way of funding R&D, because my allegation is that 
you are getting 5 cents on the dollar back in meaningful R&D 
based upon the evidence that we looked at from the IRS.
    In the old days you could afford it. It was like the market 
for shoelaces. It was an inefficient market, but who cares 
about it? It just wasn't important. It is no longer the 
shoelace market anymore. It is 2 percent of GDP and it is 
heading north, right? So at this point you got to get serious 
about squeezing the fat out of the system.
    Mr. Schondelmeyer. I agree with Mr. Love that we need to 
look for a new way to finance R&D in the pharmaceutical 
industry. I don't think I have heard any of you say, nor would 
I want to be quoted as saying, we don't want R&D in the 
pharmaceutical marketplace. We do. But we need to look for new 
and creative ways to finance it.
    I will give you one suggestion that is a bit tongue-in-
cheek, but then again maybe we should rethink it, and maybe it 
isn't. Each time a person buys a prescription at the prices 
they are paying in the United States today, perhaps they should 
be given a share of stock in that company, because the people 
buying those prescriptions are doing as much or more to finance 
the R&D in this country as the venture capitalists we have 
heard about.
    Now, I am all for venture capitalists, too. We need them, 
they are important. But much more revenue comes from the people 
buying those prescriptions than from the people putting up the 
venture capital to finance the R&D in the pharmaceutical 
marketplace today. Maybe we need to consider that.
    A second proposal to help you make good policy is--I know 
it is your goal as Members of Congress. We have heard most of 
you commenting, either through direct comments or questions or 
other things, a frustration about you can't get any information 
in this marketplace. I think one of the most critical things 
you can do that has very low actual outlay costs is require 
transparency of transactions at every level in this 
marketplace.
    Markets work when we know prices and values and can make 
conscious, value-driven decisions. We can't make conscious, 
value-driven decisions in this pharmaceutical marketplace given 
the way it is structured.
    I understand that folks from the Pharmaceutical Benefit 
Managers came before some committee in Congress and said, no, 
we can't tell you our cost structure, how we make our money. It 
is a secret. Pharmaceutical companies hide behind a law that 
you yourselves set up that says, give us average manufacture 
price and best price to help get better prices under Medicaid, 
but we can't tell you--the people who set it up--what those 
prices are.
    Change the law. Require transparency of pricing 
transactions at every level.
    Now, I have seen statements out of the administration 
suggesting that if you simply require transparency at the end 
point, the retail level, that takes care of it, because all the 
other prices wash out on the way down.
    No, they don't. What doesn't wash out on the way down are 
all of those reverse-perverse prices that we keep stumbling 
onto that get doctors to prescribe the high-price drugs instead 
of the low-price drugs that create reverse-perverse economics. 
If you want the market to work better, ask for transparency in 
pricing.
    Mr. Gutknecht. Thank you, Dr. Schondelmeyer.
    Mr. Sanders.
    Mr. Sanders. Thank you, and I will be brief.
    First of all, I want to congratulate Dr. Schondelmeyer for 
his many years of research and work. I am very familiar with 
your work and it is very nice to meet you.
    Jamie Love, thank you for your years of path-breaking work 
that you have done, especially on international issues.
    Mr. Vaughan, thank you for the work that USA Families does.
    And, Mr. Moore, we thank you for coming here today. I think 
you kind of knew that you were walking into a lion's den, but 
it is important to hear your point of view as well. I was a 
little bit disturbed that you didn't see me as one of your 
heroes of the Cato Institute, but that is OK.
    Mr. Moore. Sometimes we do.
    Mr. Sanders. That is right. Sometimes we do. We do work 
together.
    I would say that the issue here--I don't think really there 
is much of an intellectual debate--I think the issue here comes 
down to the fact that there is an industry which has billions 
of dollars of resources, which at the drop of the hat, if they 
needed to raise $500 million tomorrow for a political campaign 
to defeat any effort to lower prescription drug prices, they 
could do it. They have unlimited sums of money. And what we are 
seeing now is not I think an intellectual debate about which 
way to go. I think that debate is over, and I think, frankly, 
we have won it. The American people know what is right and 
wrong on this. Every poll shows that. But I think that we are 
up against very, very powerful political forces who have 
contributed huge sums of money to the White House, the Members 
of Congress, and that is what the debate is about: whether big 
money and special interests continue to dominate the political 
process, or whether Members of Congress can free themselves 
from that, whether the White House can free themselves from 
that, and that we protect ordinary Americans.
    Mr. Moore, obviously you have been very provocative today. 
You have gotten my interest. I just wanted to ask you one 
question. I think there is a line that some folks use coming 
from your perspective that if we have free importation with 
Canada, in a sense we are going to import Canadian price 
controls. I think you made that point.
    Mr. Moore. That is right.
    Mr. Sanders. If we accept that logic--now, as you may know, 
I am not a free trader. But right now we have a $100 billion 
trade deficit with China. You are aware of it. I was in China a 
few months ago, and as you know, everybody knows, there are 
many Chinese workers who make 20 to 30 cents an hour. They 
don't elect their leadership. If they try to go out on a 
demonstration to protest against their working conditions, they 
go to jail. You have a fierce dictatorship in China, but we 
import $120 billion of product from China.
    Now, when we import $120 billion from China, the shoes we 
are wearing and the clothing that we are wearing and the food 
that we eat, why aren't we importing China's dictatorial, 
authoritarian system when we do that? And why, if we do that, 
can't we import Canada's democratic system? That is my 
question.
    Mr. Moore. I am not sure I followed the end of that.
    Mr. Sanders. Well, the ending of it is you are saying we 
are importing price controls from Canada. And I am saying, yes, 
maybe, but that is what--you believe in free markets.
    Mr. Moore. Right.
    Mr. Sanders. That is the Canadian Government. That is what 
the people in Canada want.
    If we can import product from a dictatorship in China which 
puts people in jail for standing up for their rights, I don't 
hear you saying, ``I don't want to import the Chinese system in 
here.''
    Tell me what I am missing here.
    Mr. Moore. China--with respect to the drug issue in Canada, 
what Canada is is a free rider on a system basically.
    Mr. Sanders. So we don't have to argue, I will accept, 
others may not, I think there are price controls in Canada. I 
believe in price controls.
    Mr. Moore. They are essentially a free rider on the system. 
Unfortunately, that is bad for everybody.
    Mr. Sanders. Don't run away from my question. Stay with me 
in my question. You are saying we will import price controls 
from Canada, and you don't like price controls.
    Mr. Moore. Right.
    Mr. Sanders. Fair enough. I am saying if we carry your 
logic, we are going to import dictatorship and killing innocent 
people and crushing workers from China----
    Mr. Moore. If we import the Chinese system.
    Mr. Sanders. You would suggest that we not import products 
from China?
    Mr. Moore. Oh, no.
    Mr. Sanders. Is that your view?
    Mr. Moore. Now I understand your question.
    Mr. Sanders. I am sorry. Maybe I wasn't clear.
    Mr. Moore. I just don't agree with the premise that because 
we import goods from China at some price, that somehow we are 
importing their--in fact, I think actually the process works 
the reverse; that through free trade we are actually leading to 
a more open society in China.
    Mr. Sanders. So you don't accept the premise that we are 
importing the Chinese system.
    Mr. Moore. Right.
    Mr. Sanders. But you do accept the premise that we are 
importing negative price controls from Canada and we should not 
be able to do that.
    Mr. Moore. Yes, because what you are essentially doing is 
you are essentially--if we allowed every American consumer to 
buy drugs at the Canadian price, then you would accept the 
premise that what we are essentially doing is essentially 
having a price control system here in the United States.
    Mr. Sanders. I won't argue with that. And what about 
importing stuff from China? Are we inheriting a dictatorship?
    Mr. Moore. But that is where I sort of lose you.
    Mr. Sanders. What I am saying is I would think there would 
be more consistency if you guys believe--you guys believe, I 
think, in pretty much unfettered free trade; is that right?
    Mr. Moore. Yes.
    Mr. Sanders. That is the Cato Institute's position, right?
    Mr. Moore. Yes. My position is generally a free trade 
position, yes.
    Mr. Sanders. OK. What I am saying and the point that Mr. 
Gutknecht has made is, I guess--Gil, correct me if I am wrong--
if you believe in free trade when you bring pork bellies in 
from China, what is wrong with bringing prescriptions from 
Canada? And all that I am saying----
    Mr. Moore. I understand.
    Mr. Sanders. I think there is a major inconsistency in your 
point of view.
    Mr. Moore. I am not sure, I have been struggling with this 
very issue myself about what do we do about countries that are 
sort of undermining the price system by imposing these price 
controls. It is bad for everybody that they do it, because this 
also is undermining our R&D process in drugs.
    Yes, we have a lot of R&D, but we would have more if China 
and Canada and Britain and so forth were not imposing price 
controls.
    Mr. Sanders. OK. Jamie.
    Mr. Love. The issue is being presented, and I actually see 
things in some ways the same way Mr. Moore does, is that there 
is an issue about free riders. The United States, I think 
everybody recognizes that we are definitely--not only are we 
not the free rider, we are like paying multiples of what other 
people pay. So we are paying more.
    So, but it is not about prices; it is about research and 
development. I think that is what is important. So what we have 
been pushing for lately, and there is a big--actually in the 
last year, this brand new social movement on this issue, it is 
to change the trade agreement from specifying intellectual 
property provisions to specifying how much money each country 
has to spend on R&D, telling the country what percent of the 
GDP each country would be reasonable. We are shooting initially 
to get people intellectually to think about 10 to 15 basis 
points of GDP.
    Basically under that situation, you wouldn't care whether 
Canada had price controls or they had patents or they had 
government-funded things or they were Marxist or Cato Institute 
policy. It wouldn't make any difference.
    All you would care is at the end of the day, can they show 
you that they are funding R&D? They could really be horrible to 
their seniors or nice to them. They could make it up one way or 
the other.
    The problem you got now is you have a trade agreement that 
only deals with part of the equation. It doesn't deal with 
prices, it doesn't deal with social funding, it only deals with 
intellectual property rights. So countries, they just load a 
lot into that system right now. Then you have this kind of race 
to have higher and higher levels of IPR, because you want 
higher and higher levels of things.
    But it is not a very balanced agreement. There is no focus 
on public goods. A lot of things can happen. So the social 
movement--which there is a big, big, huge meeting in Geneva in 
April on this, and there are two more meetings in the fall 
scheduled--is just to sort of get people focused on a 
completely different paradigm.
    The trade framework is this: In January, the World Health 
Assembly has a resolution on innovation in health. The U.S. 
Government forced in May the words ``public goods'' to be taken 
out of this resolution as to how they frame this issue. So it 
is just IPR and innovation. But there is a battle about that.
    But the idea is if the WHO has a soft norm about best 
practices for R&D, including the free rider issue, how much you 
actually support R&D, both public and private sector research, 
that during the Cancun negotiations, the trade negotiations on 
the next round, at some point a developing country will come up 
and say if we exceed best practices, can we get out of the 
TRIPS agreement? In other words, does it become essentially an 
alternative to the TRIPS to do the best practices?
    The best practices become essentially a more rational way 
to think about burden-sharing, about free ridership. It 
actually becomes a public health agreement on funding R&D, not 
a commercial agreement. What you have right now is something 
that Pfizer designed, not something that public health people 
did, and you can't replace the Pfizer agreement with nothing. 
You have to replace it with something real that deals with the 
free rider issue that Mr. Moore spoke about.
    So this is basically the strategy, to get people on board 
to actually develop this best practice agreement, and then wait 
for the right moment to sort of say, you know, this can 
actually be a way to buy yourself out of the TRIPS obligation 
by following the best practices.
    Mr. Sanders. I will conclude, Mr. Chairman, by just saying 
if one is a free trader, and the bottom line of free trade--Mr. 
Chairman, you have made this point--you buy the product at the 
best place anywhere in the world, right? I think you have made 
the point that it is stronger than armies, right?
    If one holds that view, there is no rational--I am not a 
free trader, by the way, but free trade is here. I don't want 
to see Chinese economic policies destroying America's economy.
    But if you hold that view and if free traders hold that 
view, you cannot make a rational argument why people cannot go 
and buy goods from Canada. You can buy pork bellies----
    Mr. Moore. Mr. Sanders, take that point, though, to the 
extreme. AIDS drugs. You know, let's say that we develop a 
new--exciting new vaccine for AIDS that is wonderfully 
effective. And let's say where AIDS is most epidemic, in 
Africa, we want to sell that AIDS drug for 50 cents apiece 
there.
    Well, we can't sell it here for 50 cents. We can't then say 
OK, you know, we are going to sell it for 50 cents in Africa, 
and Africa can sell it back to us for 50 cents.
    Mr. Sanders. Mr. Moore, you have raised a question that we 
will need another hearing to get into. I think when it is a 
life-and-death thing, that it is the responsibility for 
government in a democratic society to make sure that people 
don't die. If it is 50 cents or 20 cents or you give it away, 
you give it away. You don't let people die because they can't 
afford a medicine.
    OK, that is my view. But thank you all very much.
    Mr. Moore, I appreciate your comments.
    Mr. Gutknecht. Thank you.
    Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman, and I second Mr. 
Sanders' comments. I really do appreciate the fact that you are 
all here and gave us your views. It is good to see many of you. 
Many of you I have known before. Jamie Love, I have read a lot 
of your things and followed what you do in the international 
arena, and it is important. And I like the idea of finding a 
different way to fund and reward research. It makes a lot of 
sense to me, and I will come back to it.
    Mr. Moore, I can't resist. Probably I should. You know, you 
said in your testimony that you hoped you weren't being 
simplistic or patronizing, and my sense is that you are being 
both. So I want to just talk about sort of the intellectual 
assumptions that are in your paper and explain why they are so 
hard to accept by a group of people who deal every day with 
constituents who can't afford their prescription drugs.
    First of all, when you use ``never'' and ``always'' 
consistently, and you say ``Price controls never work,'' ``The 
free market always works.'' ``The government always is the 
entity that is driving up prices or making life more 
complicated or whatever,'' it feels like you are creating straw 
men. You are creating straw men.
    So you are talking about things that in our world have no 
real application, because this is not a case about locking in a 
price control and saying thou shalt never charge that amount. 
It is not a case of saying we have to let the existing system 
run as it does because otherwise we will be compromising 
innovation in a way that will do great damage.
    What is missing from the type of analysis that you--two 
things are missing. One, it is evidence free. I mean, the stuff 
going on in the real world doesn't seem to impinge.
    Second, you seem unable to deal with competing goods. When 
you have been asked questions about what we could call the 
distribution of the benefit, you just get stumped, because you 
don't know what to do except to say borrow from the estate.
    You know, 98 percent of the wealth in this country, 98 
percent of the wealth in this country is held by the upper 50 
percent. So the bottom 50 percent of the people in this country 
have 2 percent of the wealth.
    The seniors we deal with, they don't have an estate. I 
mean, that is ludicrous. So many of them.
    So what we are trying to deal with, and what I suggest will 
be helpful, is to try to figure out how we deal with the 
problem where we value innovation on the one hand but we care 
about distribution of the benefit on the other. Because we are 
not talking about sailboats and how sailboats are distributed. 
We are--if you run the gambit from sailboats to automobiles to 
clothes to food to health care, you are running a gambit where 
we really care that people have some clothes and some food, and 
we do care that they have health care. Therefore, this is not 
widgets, it is not sailboats; it is a place where we need some 
balance, where we need to be able to deal with competing goods, 
where you can't have everything.
    I wanted also to say a couple things. We need people to 
recognize that there are markets, there are markets, and there 
are markets. And they are not all free markets. There would not 
be a market here, there would not be any market, if we didn't 
have the patent system. And the more you lengthen the patent 
period, the more you create what you can call monopolies; the 
more you shorten it, the more you allow competition. You can 
increase it and create more pressure for innovation; you 
contract it, you create less.
    You have a research and development tax credit. You have so 
many ways in which the government is integrally involved in the 
development of prescription drugs. You have NIH.
    What the market is doing out there is, in some cases, 
Celebrex and Vioxx, it is producing products that can be 
advertised but produce very marginal benefit for a very small 
percent of the population. That is a market failure.
    On the other hand, you have the problem of--and Mr. Love 
deals with this all the time. In many countries you have much-
needed drugs that will never return a profit to the 
pharmaceutical industry, so they don't do the research and they 
don't produce the drugs. Whether it is malaria or sleeping 
sickness or all those other tropical diseases, they don't do 
that.
    So what we need is a balance, an involvement of the private 
sector, an involvement of the public sector, so that each is 
fulfilling a role; so the private sector is fulfilling the role 
of innovation in those areas where there is an opportunity for 
a return, and the public sector is fulfilling a similar role 
where the private sector will not.
    I would like a couple of charts. Could we have those charts 
put up?
    The other thing I would just like to say is that every time 
there is a major prescription drug bill before the U.S. 
Congress, the pharmaceutical industry comes in here and says if 
you pass this law, we are going to have to cut back on research 
and development. I think that is the most frequently repeated 
wrong argument that we hear in these Chambers.
    They made this argument just before the Hatch-Waxman Act 
was passed. They made this argument before the Medicaid rebate 
was passed. And look what happened, the chart on the left. R&D 
expenditures continued, actually accelerated, after those acts 
were passed.
    Look at the chart on the left. Firm profits accelerated 
after those acts were passed.
    There are lots of reasons for the system we have. There are 
lots of reasons why the industry does do research in some areas 
and doesn't in others. But just to make it all the government 
versus the free market I think undermines what you might 
otherwise be able to contribute to this discussion.
    I guess I am happy to hear your comment on that, Mr. Moore.
    Mr. Love, I would appreciate a few comments on one of those 
market failures I mentioned, just the fact--some examples of 
these cases where there is no incentive for the industry to 
develop drugs that are much needed, but, frankly, don't produce 
a return. I know you have dealt with them in a number of 
different countries, and the pharmaceutical industry, only in 
AIDS and other cases, has been very reluctant to help out 
there, but they are in some cases.
    Maybe Mr. Love, and then Mr. Moore.
    Mr. Love. The World Bank is having a meeting today where 
one of the tracks is on research and development. One of the 
first findings is there is this difference between what the 
private incentives are for research and development and what 
the public health or the sort of social objective would be.
    One of the problems, as you mentioned, is diseases, 
primarily for the poor: Lysemias, which apparently kills about 
a half million people a year; certainly tuberculosis, malaria, 
river blindness, sleeping sickness. There is a whole series of 
diseases where there is almost no research and development. 
There has been almost no development of new products.
    So there is not a very good match between the suffering and 
death that illnesses cause and the amount of money that goes 
into the various illnesses.
    So one of the global market failures is the fact that 
research and development does not really focus on areas of 
greatest need from that point.
    Even in the northern market there is a tendency to observe 
a big market, like Viagra, whether it is an ulcer drug or 
something like that, and have companies try and actually 
decrease the profits of the first company in by trying to come 
up with similar products and basically filling out a bunch of 
competitors to the market. It actually reduces the returns of 
the first innovator by just sort of copying it. So that is a 
pretty well-known problem.
    Then there is the problem of the more innovative things. If 
they can't guarantee they can capture all their returns, they 
don't want to do that kind of research, and so there is 
underinvestment in basic research or higher risk projects or 
areas that are more speculative.
    So a lot of areas where you see the big innovations come 
from are areas where there is a lot of public sector research. 
And that is why we spend about $100 per capita on public sector 
research for health care. We spend a lot in this country. 
Unfortunately, the rest of the world spends next to nothing on 
public sector research.
    We have such a good story to tell in R&D, it is funny. Of 
all the foreign aid stories we could tell, the best story we 
have in the world is the research and development story, 
because the public sector and the private sector are outliers. 
We are way out there.
    Now the human genome project was an interesting one, 
because that was a case where there was a private company, 
Craig Venter's outfit, which was going to try and sequence the 
gene and patent the gene, venture capital, the whole sort of 
good story, private investor. Then you had several governments, 
six governments get together and publicly fund, or donor fund 
in the case of the U.K., research in order to prevent Craig 
Venter from patenting the gene. It was a public sector approach 
to create an open-source data base of human genome, because 
they believed that openness was the big deal in research.
    There are a lot of people influenced by Linux and the whole 
open source software movement. What they are saying is what the 
software movement told them is there is this idea that if--with 
enough eyeballs, all bugs are shallow with the software 
version; but the idea was the more researchers looking at the 
data, the more researchers would have access to the 
information, the more researchers working on the problem, the 
faster the R&D process goes.
    So the patent problem in some cases discourages innovation, 
because once somebody has locked up a patent position in the 
field, nobody wants to do research in it, because it is sort 
of, you know, you can't develop something unless you sort of 
consolidate all the rights.
    Mr. Allen. You are buying litigation.
    Mr. Love. You are buying either litigation or there is 
just, you know--people are very aggressive in their licensing 
thing, is another problem.
    That was a case where a big pharmacist supported a public 
domain, public, good project. They supported the human genome 
project, beating Craig Venter. And Craig Venter, he is in the 
nonprofit sector now, and his whole firm is no longer in the 
data base sector. That was a case where that open-source 
project basically won.
    So now a lot of people, like Sir John Saltsen, who won the 
Nobel Prize last year, and Tim Hubbard, are now saying well, if 
we did this with the human genome, imagine what we could do in 
other areas. And then they are looking at the resource flow and 
saying if you are spending $400 billion a year worldwide on 
medicines, and $200 billion--what is it, Steve, in the United 
States? You made me feel like the numbers I got are wrong. But 
it is a lot, right?
    Mr. Schondelmeyer. $280 billion.
    Mr. Love. $280 billion. You are approaching 3 percent of 
GDP in the United States. It is a huge number.
    If only sort of anywhere from 5 to 10 percent of that is 
going into interesting research anyhow, he is saying maybe we 
could actually have more innovation, increase the amount of 
flow going to actual research communities, and still have--
still feel comfortable about the price that seniors pay. You 
know, it becomes a form of social insurance, because if you can 
find a way to fund the R&D, it is trivial to pay the costs of 
the drugs by manufacturing costs.
    The other thing is they just feel like how long can we go 
in the world--I mean, we are in a situation where D-42, this 
product was about $4,000 in South Africa a few--about 2 years 
ago. It is a drug I worked on quite a bit. Now you can buy a 
year's supply for less than $50 in South Africa. Now we hear 
people say, well, what happened if people buy it in South 
Africa and bring it up here? So what is the solution? The 
solution used to be just let everybody in Africa die. Fine, 
that is the solution, because we don't want to upset the R&D 
thing.
    You got to understand, literally with 40 million poor 
people infected with AIDS, people were willing to make that 
call because they thought it was necessary to preserve the 
whole R&D system. Well, you have to ask yourself, you know, how 
far do we go with this idea that you really sort of allow one 
generation to suffer so the next generation can benefit from 
the medicine, which is sort of a particular way to fund R&D.
    We think it is just ethically--it becomes a moral issue. 
Actually, the National Council of Churches and some of these 
religious groups are now getting involved in this issue, and 
what they are saying is ethically, morally, because the world 
isn't just about economics, there is a moral dimension to this. 
Can we really rely on a thing that denies and rations medicine 
to the most affluent? Is it even the moral thing to do?
    It wasn't like this 15 years ago. You didn't have $20,000, 
$50,000, $100,000 medicines. You didn't have people really, 
really suffering economically because of medicine. They 
suffered from diseases, but they didn't suffer economically.
    So this idea, this sort of thinking, this new idea on 
funding research and development, this throws people for a 
loop, because they think the--they are prisoners of the dogma 
that there is only one way to fund R&D, which is hand over a 
20-year marketing monopoly. Anything else just is impossible, 
because we have government-funded and we have the patent 
system, and that is it. So some people are saying, well, maybe 
if you got rid of the whole patent system altogether and 
replaced it with something completely different, there is 
actually lots of research being done on what you could replace 
it with. A whole lot of people think you could do it faster, 
more private sector research. There are different ways it could 
be done.
    Mr. Allen. Mr. Moore.
    Mr. Moore. Well, actually, that is about the most dangerous 
idea I have heard. I mean, I really think what is driving this 
wonderful innovation in drugs is precisely the profit motive; 
that you have this vibrant venture capital industry----
    Mr. Love. I am fine on the profit motive. That is not a 
problem. The whole challenge is to design a system where you 
ride the profit motive, you ride the efficiencies, but you 
change the rules in such a way that firms are responding.
    A simple example. Right now, let's make it really a big 
tax, make it $200 per capita, and employers had to do it; then 
you were putting in like $50 billion or something like that 
into the private R&D. Every year that $50 billion, which is 
like twice what is going in it right now, roughly, in the 
private sector research community right now. If everybody knew 
that $50 billion was going to be spent every year, there would 
be like an amazing private sector experience to get that $50 
billion. I don't care what the rules were, you would have lots 
of stuff going on. If you didn't think that was enough, you 
could make it $60 billion. It would just become an instrument 
of policy, how much R&D you wanted to have.
    Believe me, it would be profits, you would have venture 
capital, you would have people putting their kids in private 
school, you would have all that good stuff that we love, right? 
But you wouldn't necessarily tie it to sky-high prices after 
the product went into the market. You would essentially pay off 
the innovators early rather than with this 20-year IOU, to just 
basically make people suffer for 20 years and then we will turn 
it into a free good.
    You would say we will make it into a free good quickly, and 
we will pay you off faster. In fact, you are wasting an 
enormous sum, because expenditures on marketing, by everyone's 
estimates, are several multiples of what you are spending on 
R&D, and it is not a social good. In fact, it is a corruption 
of the evidence base. It is essentially leading to irrational 
prescribing, all kinds of problems, and a lot of wasteful R&D 
is essentially trying to convince insurers to pay for this very 
similar drug to be paired to this similar drug. And some of the 
biggest trials are where the differences in the drugs are the 
most marginal.
    The truly innovative drugs for severe diseases a lot of 
times will come into product with less than 1,000 patients in 
clinical trials. You can have a product that is competing 
against an existing therapy, not much different, with 20,000 
patients sometimes in clinical trials, because they have to 
squeeze out that little bit of information as to the relative 
pharmacokinetic benefits, because how else are they going to 
persuade people to pay $4 a day for a drug that is about the 
same as another drug?
    Mr. Moore. Well, if that idea worked, you wouldn't need to 
set a tax, you could just set up--Mr. Love could just set up a 
venture capital fund and you could raise $50 billion and you 
could do the innovation the way you are talking about, and you 
would not have to impose a tax on anyone.
    But my point is, the day is getting late, so let me just 
summarize. We have this incredibly vibrant, profitable, 
lifesaving industry, that for some crazy reason on Capitol Hill 
is treated like this villain industry, when it has saved more 
lives than any other industry in the history of civilization.
    It is profitable. The drugs that have come out, just in the 
last 30 years, the way life has changed so dramatically as a 
result of this wonderful combination of our venture capital 
industry that funds the drugs, of the biotechnology companies 
that come up with it, the drug companies that then sell it, it 
is like you are sitting here trying to solve a problem that 
doesn't exist.
    Yes, there is a problem that when these new drugs come on 
the market they are very expensive. And you are right; in some 
cases it takes 10 or 15 or 20 years for those prices to come 
down. But it is very similar, I see it very similar to every 
other kind of high-technology industry we have today. The 
cellular telephone industry: When cellular telephones came on 
the market 25 years ago, they cost a gazillion dollars. Now 
they damn near give the things away.
    Mr. Allen. Mr. Moore, wait a minute. Wait a minute.
    Mr. Moore. It is very similar.
    Mr. Allen. If people don't have a cellular telephone, they 
don't get sick or die.
    Mr. Moore. I understand that. But that is all the more 
reason you don't want to mess around with an industry that is 
saving so many tens of millions of lives.
    Mr. Allen. Mr. Moore, this will be the last time I will say 
this, because I know we are done. But what is astonishing to 
me, and I think to others, is that you can talk about this 
industry without talking about the problem that brings us here. 
The problem is not that the industry generates expensive new 
and wonderful drugs. They do that. The problem is that people 
can't afford them.
    Mr. Moore. They can't afford them when they first come out, 
just like anything.
    Mr. Allen. No, no, no. The patents last for a considerable 
period of time.
    Mr. Moore. That is true.
    Mr. Allen. They can't afford them when they first come out, 
and it is not the single drugs. We have thousands and thousands 
and thousands of constituents in our districts, in each one of 
our districts. They may not be taking any of the new, exciting, 
expensive drugs. They are simply taking several drugs. And they 
are living on $800 a month, or $1,500 a month, or, if they are 
lucky, $2,000 a month, and they have hundreds and hundreds of 
dollars in pharmaceutical expense. They can't afford to take 
the drugs that the doctors tell them they have to take.
    And your view does not even deal with that problem, and 
that is what brought us here today.
    Mr. Moore. Don't forget, we are the healthiest society in 
the history of civilization. We have the best health care 
system.
    Mr. Allen. Well, we are not.
    Mr. Gutknecht. We may have opened up a whole new area of 
debate. I can't stay forever, and I know Mr. Allen can't, and I 
know you can't, so I am going to exercise the prerogative of 
the Chair. I had the first word, and I don't want to 
necessarily have the last word, but I do want to throw out a 
couple of things.
    I want to thank you all for coming, and I mean all of you, 
because in some respects I want to say this is a very special 
tribute to Chairman Burton. This is an enormous issue of public 
policy. It has received virtually no congressional attention. 
We are putting together a massive bill with very little what I 
would describe as real testimony from various sources with 
different points of view.
    To the credit of Chairman Burton, he has invited the 
presidents of large pharmaceutical companies, he has invited 
consumer groups, he has invited doctors, he has invited people 
with Ph.D.'s in pharmacology. We have tried to bring in a broad 
group of people.
    Now, that is not to say we are going to agree. Obviously we 
are going to disagree. But in some respects, as policymakers 
here, and as one who spent the last 4 years putting an awful 
lot of time and effort into this issue, I still feel like the 
blind man describing the elephant. This thing is incredibly 
complicated.
    The one thing I have concluded, though, is as a Teddy 
Roosevelt Republican, I don't think there is anything wrong 
with the word ``profit,'' but there is something wrong with the 
word ``profiteer.'' And at some point you cross that threshold. 
I am not certain where that is, but it is sort of like 
pornography; I kind of know it when I smell it, and it is out 
there.
    And I don't think you can talk about market forces in what 
essentially is a monopolistic marketplace. By that I mean we, 
for example, if we gave an exclusive franchise for a company to 
provide electricity for the entire United States of America, we 
certainly wouldn't say, ``Oh, and by the way, you can charge 
whatever you want to, and you have 17 years to do whatever you 
want to with it.''
    I think we all understand that at some level there is a 
public policy question, and the reason I think we are wrestling 
with this is how much the world has changed in the last 20 
years.
    I am so proud--and, Mr. Love, you said it correctly. We 
represent as Americans less than 6 percent of the world's 
population, and yet we represent over 50 percent of all of the 
basic research done in the world. And most of the rest of the 
world is getting a free ride on the research that we pay for, 
either as taxpayers, through the research that is done by 
foundations and universities, the National Science Foundation, 
NIH, and all the rest, even DARPA. We do that, and I am proud 
of that. I think we should, and I believe in research.
    But there is something else that has changed in the last 
several years, and we need to get our arms around it, and there 
is almost a moral quality to it. Especially as someone who grew 
up in the fifties, we all have a huge debt of gratitude to a 
fellow by the name of Dr. Jonas Salk. He literally saved 
millions of Americans and people around the world from an 
incredibly terrible disease. I mean, that is the best way I can 
describe it.
    Now, he did not retire a pauper, but he did not retire a 
billionaire either.
    Let me give you an example, too, and I am so proud of what 
they do at the Mayo Clinic, and I happen to represent Mayo 
Clinic, and I am proud of the University of Minnesota, and they 
are finally starting to work together, believe it or not, for 
the first time ever. But at Mayo Clinic, they developed a 
number of years ago a drug called cortisone. Cortisone is a 
multibillion-dollar market potential drug. You know what they 
did with it? They gave it to the world.
    Something has changed in the ethics of research in this 
country, and now we are trying to patent genes, and it seems to 
me that we as a Congress have to come to grips with what has 
changed in this world, the monopolistic powers, and somehow try 
to bring some sanity into this system; because it is about our 
patent laws, it is about what we will pay for prescription 
drugs, it is about what is a fair rate of return.
    For example, this Congress contracts with defense 
contractors to build unbelievable aircraft. We watched what 
they can do, and we watched in real time on Fox News and 
others. But we also have the right and we reserve the right to 
audit those defense contractors. We guarantee them a reasonable 
rate of return.
    We have nothing like that in the licensing agreements we 
have for new patents and new technologies and new processes and 
new pharmaceuticals, and it seems to me this committee--this 
actually should be a full committee--and we should be meeting 
all the time, talking about and trying to figure out what the 
right thing to do is.
    I don't know what the right thing to do is. I mean, 
personally, I am not sure that even reimportation is the right 
answer, but it is the best answer we can come up with to try 
and at least bring some discipline, market discipline to this.
    I just throw that out. If any of you want to respond to 
anything I just said? Maybe it makes no sense.
    Mr. Vaughan.
    Mr. Vaughan. Just one thing. When Edward R. Murrow asked 
Dr. Salk about how he was going to deal with patenting, Salk 
replied, ``Could you patent the sun?'' and I think you make a 
great point. What have we lost in the sense of a golden mean or 
moderation? I mean, how much is enough? And these guys don't 
seem to have any sense of enough is enough. So it is, to us, 
profiteering.
    Mr. Gutknecht. Let me just say that--and I think that is 
the point. You think up to this point we as policymakers have 
pretty much been laissez-faire. But, you know, when a company 
starts--some of the behavior we have seen in the last several 
years, we have one company that is spending $3.9 billion, by 
their own admission in front of this committee, $3.9 billion 
advertising and marketing products that consumers can't get 
without a doctor's prescription. You know, it just seems to me 
then they have sort of crossed the line, and people on this 
side of the desk have to do something about it. I am not sure 
what the right thing is.
    Mr. Love, you were going to say something?
    Mr. Love. Well, if I would think about two themes in terms 
of followups out of here, one would be a meeting where you just 
focus on the issues of transparency. Steven mentioned that. I 
think it is quite important.
    This is an area where a big part of the agenda of companies 
is to prevent anybody from knowing what is going on. I mean, 
everyone is supposed to have like, I don't know, a blindfold on 
or something like that. I think the idea that being blind is 
somehow a good thing for everybody needs to be challenged.
    But also, you know, it would be really interesting to kind 
of walk through a list of things that people should know that 
they don't know: like what clinical trials cost, what is the 
NIH license, how much money does it get on its licenses, what 
are prices, how much of GDP are we spending, or how much of 
this, that or the other thing?
    It would be good to kind of start out with an evidence 
base, but also policies about transparency and where that needs 
to go. I think that moves us toward actually having better 
information for making decisions.
    Then the second one is to, I think, really sort of go back 
and look at this R&D issue and not be afraid of it. I mean, 
what I think you need to do is to take their strongest argument 
and make it your strongest argument, because otherwise you are 
going to suffer.
    I can tell you that if R&D is their argument, and you are 
on the other side of that one, that is an unpleasant place to 
be for everyone that has someone that suffers from an illness 
that there is not a good cure for.
    I mean, Americans are optimistic. We want the next drug. We 
want the next thing. So you have to basically champion R&D, but 
do it from a public health point of view, not the current way. 
You have to reinvent the R&D issue in a way that really you 
believe in, that suits your objectives in terms of it.
    It has to be consistent with access, R&D consistent with 
access, and efficiency, because we are economists.
    One thing he didn't hear the Cato Institute talk about, and 
I am really disappointed in this--in fact, I am really 
constantly surprised--is scarce resources, efficiency, bang for 
the buck, cost/benefit analysis. Bringing cost/benefit analysis 
into the process is something that is just overdone.
    This are a lot of these so-called incentive things that are 
just sort of open-ended corporate welfare schemes, and they 
don't pass the muster as far as cost/benefit analysis is 
concerned.
    More cost-benefit analysis is your friend in this area. And 
I think that, you know, bringing some rigor into how you think 
about R&D would be really a fun work program. And if you put 
those two things together, you know, building up the evidence 
base better, and then bringing up the sort of cost-benefit and 
rigor into how you buy R&D issue, I think you begin to really 
change the debate.
    Mr. Schondelmeyer. I've heard arguments about free trade 
and opening up the market with Canada, importing price 
controls. I would argue that just the opposite might occur, 
that we might export free trade, to Canada, to Europe, and 
maybe raise the prices and get the rest of the world to quit 
being free riders. What's wrong with that? Basic economics. 
Second thought. I would challenge, what do we mean by price 
controls in Canada? We have thrown that around a lot today. I 
think there's a lot of rhetoric around that.
    Mr. Gutknecht. And Dr. Schondelmeyer, I am so glad that--
frankly, I wish we had more time. I would love to have just a 
hearing on this issue, because I think this is the most 
misunderstood, misstated, and abused concept about exactly how 
price controls work in Canada and some of the other countries. 
So, please----
    Mr. Schondelmeyer. I'll just briefly phrase it. I would 
encourage--actually, the AARP bulletin, their newsletter that 
just came out in June 2003, great article: Why Drugs Cost Less 
up North. Now, it doesn't definitively answer that question, 
but it talks about their system of paying for drugs.
    First of all, Canada does have a law at the Federal level 
that sets up a Patent Medicine Price Review Board that reviews 
the prices of all new drugs approved in Canada. It's been in 
operation for just over 15 years, and in the 15 years they have 
only taken legal action to set the price of four drugs. Four 
drugs. Twenty other drug products, the drug companies 
voluntarily adjusted their prices because they sensed that the 
Board was uneasy. So we have had 24 products in 15 years have 
their prices substantially influenced by the price controls in 
Canada.
    The Canadian Federal Government does not pay for 
prescription drugs, just like the U.S. Government doesn't pay 
for drugs under Medicare in general in the U.S. Drugs paid for 
in Canada are paid for through the Provincial Government Health 
Plans, and their Government Health Plans are much like our 
Medicaid program. But they include not only the poor but the 
elderly. They do take care of the elderly at the Provincial 
level, and a much broader group than just the elderly. Middle-
income people in most provinces have their prescription drugs 
either fully or partially paid for. And the Provincial 
Governments do not set prices. They set a formula of, here are 
the drugs we will cover, here are the prices we will pay. Just 
like the private market, the PBMs, HMOs, managed-care 
organizations in the United States a set, a formulary, say 
here's how much we will pay. So Canada operates just like the 
U.S. market.
    Mr. Gutknecht. Can I just clarify that?
    Mr. Schondelmeyer. Yes.
    Mr. Gutknecht. So, in other words, they say what they will 
reimburse just like if it were an insurance company.
    Mr. Schondelmeyer. Yes. And if a consumer wants a drug that 
is not on the formulary list, they are welcome to buy it and 
pay the full cost, and the drug company can charge whatever 
they want for it. Those prices are not set. So, to my 
knowledge, four drugs have had their price set and another 20 
have had their prices influenced. I would argue we have had 
more price controls on pharmaceuticals in the United States 
than Canada has. I know for a fact Medicare set the price on 
Epogen, and in their discussions with TAP and Astrazeneca and 
Bayer, the groups that have settled with the Department of 
Justice, they had them adjust their prices that they list. They 
didn't tell them what the price would be, but you have to 
report an accurate and true price--a novel concept.
    Mr. Gutknecht. And in each of those cases, they reimbursed 
the government to the tune of hundreds of millions of dollars.
    Mr. Schondelmeyer. And they paid back hundreds of millions 
of dollars to the government. So you could argue those prices 
were set in a sense. We have had as many price controls in the 
United States. Maybe we run a danger of importing or exporting 
price controls to Canada.
    Mr. Gutknecht. Well, thank you, Dr. Schondelmeyer. And I 
would really, for the benefit of the staff, I would like to 
have a subcommittee hearing if--and I'm not even on the 
subcommittee, and here I am chairing it, but I really would. I 
think that's the subject in itself of a hearing of exactly how 
a few of these other countries really arrive at the prices that 
are ultimately paid. And I think it would be eye-opening for 
members of this subcommittee, certainly for me, because the 
more you learn about this industry--again, I go back to the 
analogy of the blind man describing the elephant. The more you 
learn, the more curious this is about the way this whole 
process works.
    But I want to thank all of you sincerely. This has been a 
very good hearing, at least from my perspective. And this is 
the kind of thing that we need a lot more of to get to the 
bottom of this, so that we can actually set good public policy. 
The concern I have, and I will editorialize here, is we are 
going to be asked to make a very important decision in the next 
36 hours on an enormously expensive entitlement, which I don't 
understand, most Members don't understand, and could cost us 
for generations to come. That's my editorial point of view. I 
think we should have had literally many, many more hearings 
like this to try to get to the bottom of what the correct 
public policy course is to take. Thank you so much.
    We will keep the record open for 10 days so that members 
may revise and extend their remarks or put extraneous materials 
into the record. Any other materials that you would like, 
including the article which you quoted from, Dr. Schondelmeyer, 
if you wouldn't mind, if we could make that a part of the 
permanent record, we would appreciate it. Any other items that 
you would like put in the record, we would be delighted to put 
in. With that, I would adjourn this meeting.
    [Whereupon, at 5:26 p.m., the subcommittee was adjourned.]

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