[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
   ALLEGATIONS OF WASTE, FRAUD, AND ABUSE IN PHARMACEUTICAL PRICING: 
 FINANCIAL IMPACTS ON FEDERAL HEALTH PROGRAMS AND THE FEDERAL TAXPAYER

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 9, 2007

                               __________

                            Serial No. 110-4

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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             COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 9, 2007.................................     1
Statement of:
    Dicken, John E., Director, Health Care, Government 
      Accountability Office; Lewis Morris, Chief Counsel to the 
      Inspector General, U.S. Department of Health and Human 
      Services; Ronald J. Tenpas, Associate Deputy Attorney 
      General, U.S. Department of Justice; and Patrick J. 
      O'Connell, chief, Civil Medicaid Fraud Section, Office of 
      the Attorney General of Texas..............................   116
        Dicken, John E...........................................   116
        Morris, Lewis............................................   134
        O'Connell, Patrick J.....................................   163
        Tenpas, Ronald J.........................................   147
    Schondelmeyer, Steven, PharMd, Ph.D., professor and head, 
      Department of Pharmaceutical Care and Health Systems, 
      University of Minnesota College of Pharmacy; Gerard F. 
      Anderson, Ph.D., professor, Department of Health Policy and 
      Management director, Center for Hospital Finance and 
      Management, Johns Hopkins Bloomberg School of Public 
      Health; and James W. Moorman, president and CEO, Taxpayers 
      Against Fraud..............................................    47
        Anderson, Gerard F.......................................    57
        Moorman, James W.........................................    72
        Schondelmeyer, Steven....................................    47
Letters, statements, etc., submitted for the record by:
    Anderson, Gerard F., Ph.D., professor, Department of Health 
      Policy and Management director, Center for Hospital Finance 
      and Management, Johns Hopkins Bloomberg School of Public 
      Health, prepared statement of..............................    59
    Cooper, Hon. Jim, a Representative in Congress from the State 
      of Tennessee, report, ``Inside Tennessee's Medicine 
      Cabinet''..................................................    24
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia:
        January 10, 2007, CBO analysis...........................    11
        Letter dated January 11, 2007............................    93
        Prepared statement of....................................    17
    Dicken, John E., Director, Health Care, Government 
      Accountability Office, prepared statement of...............   118
    Moorman, James W., president and CEO, Taxpayers Against 
      Fraud, prepared statement of...............................    74
    Morris, Lewis, Chief Counsel to the Inspector General, U.S. 
      Department of Health and Human Services:
        Letter dated February 16, 2007...........................   181
        Prepared statement of....................................   136
    O'Connell, Patrick J., chief, Civil Medicaid Fraud Section, 
      Office of the Attorney General of Texas, prepared statement 
      of.........................................................   165
    Schondelmeyer, Steven, PharMd, Ph.D., professor and head, 
      Department of Pharmaceutical Care and Health Systems, 
      University of Minnesota College of Pharmacy, prepared 
      statement of...............................................    51
    Tenpas, Ronald J., Associate Deputy Attorney General, U.S. 
      Department of Justice, prepared statement of...............   149
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................     4


   ALLEGATIONS OF WASTE, FRAUD, AND ABUSE IN PHARMACEUTICAL PRICING: 
 FINANCIAL IMPACTS ON FEDERAL HEALTH PROGRAMS AND THE FEDERAL TAXPAYER

                              ----------                              


                        FRIDAY, FEBRUARY 9, 2007

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2154, Rayburn House Office Building, Hon. Henry A. Waxman 
(chairman of the committee) presiding.
    Present: Representatives Waxman, Cummings, Tierney, 
Yarmuth, McCollum, Cooper, Sarbanes, Welch, Davis of Virginia, 
Bilbray and Sali.
    Staff present: Phil Schiliro, chief of staff; Phil Barnett, 
staff director and chief counsel; Kristin Amerling, general 
counsel; Karen Nelson, health policy director, Karen Lightfoot, 
communications director and senior policy advisor; Sarah 
Despres, senior health counsel; Brian Cohen, senior 
investigator and policy advisor; Steve Cha, professional staff 
member; Earley Green, chief clerk; Teresa Coufal, deputy clerk; 
Davis Hake, subcommittee clerk; Kerry Gutknecht, staff 
assistant; David Marin, minority staff director; Larry 
Halloran, minority deputy staff director; Jennifer Safavian, 
minority chief counsel for oversight and investigations; Keith 
Ausbrook, minority general counsel; Anne Marie Turner, minority 
counsel; Susie Schulte, minority senior professional staff 
member; Kristina Husar, minority professional staff member; 
John Cuaderes, minority senior investigator and policy advisor; 
Patrick Lyden, minority parliamentarian and member services 
coordinator; Benjamin Chance, minority clerk; Yasmin Szabados, 
minority intern; and Bill Womack, minority legislative 
director.
    Chairman Waxman. Meeting of the committee will please come 
to order.
    Today we will complete our first set of hearings into the 
impact of waste, fraud, and abuse on the taxpayer. In this 
hearing we will investigate allegations that some 
pharmaceutical companies are profiteering from public health 
programs at the expense of the American taxpayer and the most 
vulnerable in our society, the poor and the elderly who rely on 
these programs for their health care.
    We will hear testimony about patterns of waste, fraud and 
abuse in pharmaceutical pricing. The testimony will help us 
determine our priorities for future oversight in this area.
    I care deeply about this issue. Throughout my career in 
Congress I have worked hard to expand and improve health care 
coverage for seniors, for persons with disabilities and for 
low-income families; and I have worked just as hard to make 
sure that the taxpayers get their money's worth out of the 
Medicare, Medicaid and public health programs. That is why I am 
so concerned about these allegations involving the 
pharmaceutical industry. If even half of them are true, 
billions of Federal dollars that should be buying needed care 
are instead adding to drug company profits. That waste would be 
bad enough but in this area of tight budgets it is particularly 
tragic.
    We will hear reports that the Federal Medicaid program, 
which provides health care to almost 50 million low-income 
beneficiaries, has been repeatedly overcharged for essential 
medications.
    The Medicaid program is a huge purchaser, buying over $30 
billion worth of drugs in 2005. Congress in 1990 recognized 
that such a large purchaser should get low prices and passed 
legislation requiring that drug manufacturers provide the 
Medicaid program with the same discounts they provide private 
purchasers such as large HMOs and hospital chains. But, 
according to whistle-blowers who have filed dozens of cases 
over the last decade, drug manufacturers have deliberately 
crafted business plans to avoid giving Medicaid the proper 
discounts.
    Today, we will hear testimony from the Texas Attorney 
General's Office and the U.S. Department of Justice detailing 
some of the tactics used by pharmaceutical companies to avoid 
providing appropriate discounts to Medicaid.
    The laws are here for waste, fraud and abuse in the Public 
Health Service's 340B program. Under this program, federally 
funded health clinics are supposed to have access to brand name 
and generic drugs at very low prices. These programs serve 
vulnerable populations, and they do it while facing severe 
budget shortages.
    But a series of reports and audits by the GAO and by the 
HHS Office of the Inspector General have found that these 
clinics are being overcharged for the drugs they need, costing 
them tens of millions of dollars annually; and I look forward 
to hearing from the HHS Inspector General and GAO about how to 
make these critical public health programs work better.
    Finally, we will hear about the Medicare Part D program. 
This new program has been controversial from the start, passed 
in the dark of night, amid allegation that votes were being 
bought and sold on the House floor and that the Bush 
administration hid the true costs of the new program. The 
proponents of the new Part D program argued that private 
pharmacy benefit managers and insurers that provide the 
benefits would be able to obtain the low prices from drug 
manufacturers, but the evidence seems to point in the opposite 
direction.
    Analyses by my staff and others suggest that drug prices 
under these plans are higher than prices in other Federal 
programs, higher than prices in Canada, and even higher than 
prices available on Costco and drugstore.com. Beneficiaries are 
justifiably puzzled as they see out-of-pocket costs increasing 
and drug prices skyrocketing at three to four times the 
inflation rate. Meanwhile, drug companies are reporting massive 
increases in their profits.
    Dr. Schondelmeyer and Dr. Anderson will provide us insights 
into what is happening with the Part D drug prices.
    This committee will have an aggressive oversight agenda 
when it comes to pharmaceutical manufacturers and other 
companies that engage in wasteful, fraudulent or abusive 
tactics that affect Federal health care programs.
    We begin our oversight with this hearing and with a set of 
letters that I am sending today to the insurers and pharmacy 
benefit managers that are running the Medicaid Part D program. 
I am asking these companies to provide us with information on 
the discounts that they have negotiated with drug manufacturers 
and the way in which these discounts are being passed on to 
seniors who are signed up for Medicaid Part D.
    This information will be critical as our committee assesses 
whether high drug costs are increasing beneficiary costs and 
wasting taxpayers' dollars in the Medicare drug program. The 
testimony we hear today will help us establish additional 
investigative priorities for the next 2 years, and I am looking 
forward to hearing from our witnesses today.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Chairman Waxman. Before we call on our witnesses, I want to 
recognize, first of all, Mr. Davis, the ranking member of the 
committee, to make his opening statement. We will have opening 
statements not to exceed 2 minutes by other Members who seek 
recognition, and Members may instead submit their statements 
for the record, which will be held open for 7 days.
    Mr. Davis of Virginia. Mr. Chairman, thank you very much.
    I want to note for the record that I am unable to join you 
in the request for the information, because I think we are 
entitled to this information, but I think the manner in which 
you seek it is one which I am not ready to support at this 
point.
    This information is required to be submitted to the Centers 
for Medicare and Medicaid Services. CMS is the repository of 
this information, so it seems to me it would be faster and 
easier if we got this information from CMS, rather than having 
to go to 12 different providers. It is sitting there.
    I have to wonder whether this goal is to harass the private 
industry or to get the information. So we have a letter today 
going out to CMS for this same information, giving them 2 
weeks; and we will see who gets there first.
    I want to thank the chairman for holding today's hearing to 
consider the potential for waste, fraud and abuse in three 
Federal health care programs. In the past, we shared a 
bipartisan zero tolerance approach to the misuse of vital 
health care dollars, and I look forward to continuing that 
important work on behalf of U.S. taxpayers.
    This oversight fiscal vigilance also means better physical 
well-being for millions of Americans who use these Federal 
programs. As you will hear today, both the HHS Inspector 
General and the Department of Justice are actively prosecuting 
drug manufacturers who circumvent pricing and reporting 
requirements designed to make sure patients treated by 
Medicare, Medicaid and public health clinics get mandated 
discounts on prescription drugs.
    In the complex world of pharmaceutical prescribing, 
packaging and pricing--as in the rest of the health care 
delivery system--costs shift between providers, payers and 
patients, and it can be difficult to trace.
    But when payments shift unlawfully into someone's pockets, 
oversight systems have to be able to detect and recoup those 
losses. So I am particularly interested in hearing testimony 
from today's witnesses on the different forms of waste, fraud 
and abuse they find in these very different Federal health 
programs.
    In the Medicaid and 340B systems, the Federal Government is 
directly involved in negotiating drug prices. Some of us call 
that the old way of doing things. We will hear today how those 
systems have been scammed.
    On the other hand, the new Medicaid Part D prescription 
drug program passed in 2003 I think by one vote--my vote--
relies far more heavily--I think I am the only one in the room 
who supported it--been ascribed to by an overwhelming number of 
seniors. It is a program, I might add, that 1 million VA 
beneficiaries have voluntarily migrated from the VA system, 
where you have direct government negotiations, to Medicare Part 
D because of the options that it gives them trying to bring 
competition to the market place.
    We rely far more heavily on competitive market forces to 
get the best price for our senior citizens. The health care 
delivery systems today really lack competition. It is a third-
party payer system. One of the things we try to do with this 
type of program is try to bring direct competition in. And just 
to note if you take a look at health care today and the rising 
costs there is one area where health costs are going down, 
laser surgery for eyes. It not covered by insurance companies, 
and people pay directly for that service, and it has driven 
costs down, and it has driven technology up.
    Those of us on this side believe competition is the best 
way to bring costs down, not some one-size-fits-all government 
program. Because, as I said before, a million veterans have 
migrated from this system voluntarily to the Part D system.
    Now the majority mistrusts that mechanism, alleging higher 
cost, greater potential for fraud because the Part D lacks the 
best-price provision that Federal price negotiators might get 
in that better deal. We passed H.R. 4 to give the HHS Secretary 
that negotiating authority.
    With that in mind, I hope this hearing is not an exercise 
in backward oversight, a conclusion in search of facts. There 
is no evidence that the Medicare prescription drug benefit is 
more costly or more prone to abuse than any other government-
run-programs under discussion here today. In fact, the average 
monthly premium for the basic Medicare drug benefit is down 
more than 40 percent from the $37 per month originally 
projected. This year, the average monthly premium for the basic 
benefit is $22, a dollar less than the year before. Where else 
in health care is that happening?
    A recent Congressional Budget Office analysis of H.R. 4 has 
concluded the bill would have very little effect on net Federal 
spending and would not result in drug prices any lower than 
those achieved by the current system; and, as I said before, 
the current system offers more options, more choices, which is 
why veterans are migrating from the current system that have 
particular needs.
    I would ask unanimous consent, Mr. Chairman, to insert the 
January 10, 2007, CBO analysis into the hearing record.
    Chairman Waxman. Without objection, it will be entered.
    [The information referred to follows:]

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    Mr. Davis of Virginia. I think this is great news for 
American seniors, and it is a direct result of competition and 
choice. It is also probably why 80 percent of participating 
seniors are happy with the drug benefit. If the young Medicare 
Part D program is susceptible to unique forms of waste, fraud, 
and abuse, we need to hear about it from these witnesses, and 
we need to address those vulnerabilities with deterrence and 
strong enforcement programs. I am sure there are scammers out 
there that will figure the new program, ways to get into that, 
too.
    Let me just also note that there are three PBMs that have 
greater buying power than the Federal Government. So the 
Federal Government isn't the largest purchaser. We are the 
fourth largest purchaser in the marketplace, and for those who 
think that somehow--and many of the plans currently under 
Medicare Part D are utilizing that buying power to lower their 
costs.
    But we shouldn't base our oversight on premature 
conclusions about the efficiency and the pricing mechanism that 
is serving 33 million citizens so well today.
    I look forward to this hearing, Mr. Chairman. This is an 
important hearing, and I appreciate your calling it.
    [The prepared statement of Hon. Tom Davis follows:]

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    Chairman Waxman. Thank you, Mr. Davis.
    Let me point out that we have written directly to the 
pharmaceutical manufacturers because the information we have 
requested is quite sensitive and we would rather deal with them 
directly on the issues they may raise. Mr. Davis has contacted 
HHS, we both want this information, and we will work together 
once we get it.
    Mr. Davis of Virginia. Absolutely. Absolutely.
    Chairman Waxman. Thank you.
    I want to now recognize Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. Thank you for having 
this hearing.
    In my district, besides having any number of people that 
are receiving prescription drug assistance through the Medicare 
Part D program and veterans program and the federally funded 
community health clinics, they probably would not want to see 
Mr. Davis if he were claiming that he was the vote that passed 
the Medicare bill because, since the doughnut hole kicked in, 
most of them would like to find him and kick something else.
    But the fact of the matter is I think it is denies logic to 
think that we are giving away some $57.5 million in subsidies 
to private entities and then claiming that we are saving the 
taxpayer money. So I am looking forward to this hearing. I 
think we have to get to the bottom if there is waste, fraud or 
abuse in any of these programs and anticipate what might rise 
in other programs so that we can stay on top of that and save 
individuals as much as we can.
    It is vital and critical, as we know, for these people to 
be able to afford the prescription drugs. We should do all that 
we can in that sense, and I am glad we are going to do it in a 
bipartisan manner and get that information. That will be 
important.
    Again, I want to thank you, Mr. Waxman, for conducting this 
hearing.
    Chairman Waxman. Turning to Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, I wasn't going to make an opening statement, 
and I am sure that will make a lot of people happy. But I can't 
go a long time without pointing out that I appreciate the fact 
that the chairman and the ranking member have such a good 
working relationship. And I just--after that opening statement 
by the ranking member, I hope that the Members on the other 
side of the aisle realize what a resource the ranking member is 
from a lot of point of views.
    But perception of Republicans always coming from the 
business side of the spectrum is a misperception. The ranking 
member is somebody who has actually provided health care to the 
public, actually with a public agency, was the director of a 
public agency that served millions of people that actually got 
the job done.
    Too often in Congress we have people that come from 
different spectrums but very few of us have the practical 
knowledge and experience--of firsthand experience of providing 
this service to the public, and I think that Mr. Davis's 
experience is something that both sides of the aisle should 
draw on, and I am glad to see that the chairman works so 
closely with the ranking member on this issue.
    And I may be prejudiced because, like it or not, I come 
from the same background. I was a county supervisor. I was an 
executive for the county that actually provided those programs 
that the Federal and State legislators always talk about but 
never really execute. And I hope that we are able to work 
across the aisle, draw upon the experience of everyone here, 
especially those of us that have worked with these types 
programs and have experienced the huge gap between the 
theoretical approach and the practical application. I think 
both sides can learn from that practical experience.
    I want to commend the ranking member for continuing the 
good relationship with the chairman of this committee; and, 
hopefully, those who receive our services or should be 
receiving our Federal services will be able to benefit from 
this relationship.
    I yield back, Mr. Chairman.
    Mr. Davis of Virginia. I think we ought to be given 5 
additional minutes, the way he is going.
    Chairman Waxman. Well, thank you, Mr. Bilbray. I am 
constantly reminded of the enormous value that Mr. Davis brings 
to the deliberations of this committee. He is a consummate 
Member of Congress, and I am pleased to be able to have this 
opportunity to continue to be able to work with him.
    Mr. Davis of Virginia. In your current capacity.
    Chairman Waxman. Especially.
    But I didn't know you actually provided the services 
directly.
    Mr. Davis of Virginia. County government. I did. I didn't 
deliver any babies or anything.
    Chairman Waxman. Thank you.
    Mr. Bilbray. There are some who claim he was providing the 
drug benefits.
    Chairman Waxman. Who is next in seniority? Ms. McCollum.
    Ms. McCollum. Thank you Mr. Chairman for holding this 
meeting on what I think we all know is a very important issue. 
There is not an American in this country who isn't affected by 
the pharmaceutical industry.
    I would also like to thank all the witnesses for being here 
today, but in particular I would like to offer a warm welcome--
because it is warmer here in Washington, DC, than it is in 
Minnesota--to Dr. Stephen Schondelmeyer, professor and head of 
the Department of Pharmaceutical Care and Health Systems at the 
College of Pharmacy at the University of Minnesota. Welcome. It 
must feel a lot warmer than the below zero we had back home.
    For me and the people that I represent, we don't view 
health care in the United States as a privilege. In the 
wealthiest country in the world, for its citizens, health care 
should be a right. But the cost of health care and how we 
provide that is a critical issue and one that must be discussed 
here in Congress. We also heard this loud and clear in the last 
election. People want health care addressed in this Nation.
    By 2015, health care costs are expected to total around $4 
trillion. That is 20 percent of the gross national product. We 
know that rising health care costs have a very strong affect on 
family budgets, employers and, yes, the Federal budget well. 
The costs are also responsible for the rising number of 
uninsured, currently 46 million Americans, and--can you believe 
it--there are 8 million children in this country without access 
to health care.
    There are many important factors that drive up the health 
care costs, and today we are going to talk about the costs of 
prescription drugs. Prescription drugs are a vital part of 
health care and improving the quality of life for our families. 
However, the pharmaceutical companies need to know that we must 
be treated in a fair manner both as citizens and as a 
government. As I say in my community, access to the quality of 
care is a first priority, not corporate profits.
    In Minnesota alone, we have had to file lawsuits against 
pharmaceutical companies. One was found guilty of inflating the 
costs of chemotherapy drugs for the treatment of breast cancer, 
lung, testicular cancer and other cancers 12 to 20 times what 
it should have been.
    Another form of fraud that is costing taxpayers money is 
the promotion of off labeling. I spoke with a person who had 
intimate knowledge on this, professionally working with the 
government and pharmaceutical companies; and he shared with me 
about the case where a doctor was paid hundreds of thousands of 
dollars by Jag Pharmaceutical to promote off-label use of a 
narcolepsy medication with a primary ingredient GHB, the date 
rape drug, the doctor prescribing this dangerous drug, which is 
in the same class as heroin, as a therapy for patients 
suffering from fatigue, chronic pain and other unapproved uses. 
The pharmaceutical company was also counseling doctors on how 
to ensure reimbursement for this unapproved treatment.
    While these are two examples of fraud, Mr. Chairman, I know 
we are going to be hearing about what this government can do to 
protect its citizens and make access to pharmaceuticals more 
effective. But we have to keep in mind that we are here to 
represent people, people who don't have health care, people who 
have often been victims of crimes due to off-labeling.
    So I am here to hear more about this serious issue. This 
hearing is an important first step in moving forward to address 
the problem of access to pharmaceuticals in this country.
    Thank you, Mr. Chair.
    Chairman Waxman. Thank you for your opening statement.
    Mr. Sali.
    Mr. Sali. Thank you, Mr. Chairman.
    We all know that no one on this committee is willing to 
accept the misuse of taxpayers' dollars, especially with 
respect to critically needed prescription drugs. Millions of 
Americans depend on prescription pharmaceuticals not only for 
good quality of life but for their very survival. When such 
drugs are deliberately priced out of people's reaches, it is an 
affront to the men and women who depend to prescription 
medications, and it has to be stopped.
    Yet drug prices in many regards are going down almost 
across the board and primarily from competition. Wal-Mart, for 
example, now offers 331 generic prescription drugs for only $4 
per month. That is what happens when market-based competition 
is allowed to operate.
    According to the Centers for Medicaid and Medicare 
Services, as a result of strong competition and informed 
beneficiary choice, the average Part D premium due to basic 
benefits is 42 percent lower than had been projected 
originally; and the cost of the average premium is also going 
down another dollar between 2006 and 2007, from $23 to $22.
    Although we are looking at $113 billion in greater savings 
in the Medicare prescription drug program over the 10 years, 
from 2007 to 2016, it is also noteworthy that the President has 
proposed a far-reaching plan to curtail excessive costs in the 
Medicare program, including his proposal to introduce 
competitive bidding for clinical laboratory services.
    It is my hope, Mr. Chairman, that we join those on this 
side of the aisle in giving these factors appropriate and 
careful consideration and regard in this hearing.
    Additionally, prescription drugs, even when high-priced, 
can be much less expensive than such things as emergency care, 
hospital care, and other expensive therapies. This isn't to 
justify price gouging, but perspective is important, and we 
need to keep it in place as we consider this issue.
    Let's also remember something said by Will Rogers many 
years ago, this country has come to feel the same when Congress 
is in session as when baby gets ahold of a hammer.
    In the name of protecting people from waste, fraud and 
abuse let's not make the mistake of waving a hammer 
indiscriminately. Let's make the taxpayers proud of our fair 
and thoughtful deliberation here today and throughout this 
upcoming session of Congress.
    Thank you, Mr. Chairman. I yield back.
    Chairman Waxman. Thank you for your statement.
    Mr. Cooper.
    Mr. Cooper. I thank the chairman for calling what is one of 
the most important hearings of the year both for the taxpayer 
and for anyone with a health problem. I represent part of the 
State of Tennessee and, according to a recent Blue Cross/Blue 
Shield study, our State once again ranks No. 1 in America in 
terms of prescription drug prescriptions per citizen.
    We also rank No. 1 in America among all the States for drug 
spending per capita. It is some 17.3 prescriptions per person 
and a drug bill per person of over $1,100. And yet, for all of 
this therapy, we rank 47th in America in terms of our health 
status.
    That is one aspect of the problem of what is going on in a 
State like Tennessee.
    Another aspect is--as we will hear from these distinguished 
witnesses--the line of fines and, in some cases, criminal 
penalties since the year 2001 is extraordinary. It approaches 
and exceeds $4 billion. The recent Bristol-Myers Squibb 
settlement pushes it over Mr. Moorman's limit of $3.9 billion. 
That is enough money to fund health care for virtually every 
poor child in America for a year.
    But the finding that, Mr. Moorman, that really impressed me 
was, with 180 pending cases unresolved, the liability could be 
as much as $60 billion. That is almost double what we spend to 
defend America in homeland security every year, and this is one 
relatively small group of very prestigious companies.
    Why is so much wrongdoing going on? That is the purpose of 
this hearing. And I would ask that unanimous consent of the 
Blue Cross study be included as well as the recent--Bristol-
Myers Squibb settlement.
    Chairman Waxman. Without objection, those documents will be 
added to the record.
    [The information referred to follows:]

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    Chairman Waxman. I think, Mr. Yarmuth, you are next.
    Mr. Yarmuth. Thank you, Mr. Chairman. I also congratulate 
you on calling these hearings on a most important topic; and I 
would also like to say that I am also very interested in 
hearing Dr. Schondelmeyer who, while living in Minnesota now, 
was trained at the University of Kentucky. So welcome to you.
    Mr. Chairman, I want to express my appreciation to you. We 
all owe a debt to the generations that came before us, the men 
and women who made this country great. But, instead of paying a 
debt, we are failing our seniors. It would be difficult to deny 
that. When Canada and Costco are offering better prices on 
prescription drugs than the United States, that is an utter 
failure.
    We will talk about many things probably during these 
hearings, why a certain Member of the Congress left after--for 
a $2 million PhRMA salary after guiding the passage of Medicare 
Part D. And we will talk about cases of fraud and the $115 
million spent lobbying on Part D alone. And we will certainly 
discuss the fact that even the laws that the drug companies 
haven't written themselves they break, like the mandatory 15 
percent discounts to Medicaid recipients. They simply refuse to 
comply, yet they go on unrestrained.
    These aren't new facts. But what has changed is this: We 
now have a Congress ready to do something about it, and today's 
hearing is the beginning of that change. We are here to find 
the answer to why the rule of law ceases to apply and our 
intended beneficiaries are suffering as a result.
    But this I already know: Our present course cannot continue 
unchecked while Americans are in need, indeed are exploited and 
suffering. We have an obligation not only to our seniors but to 
American citizens whose tax dollars are funding a system to get 
the best possible deal on their behalf.
    I am confident this new Congress will fulfill that 
responsibility. This hearing is a positive first step and I 
hope just the beginning of what we will do to contain costs and 
make sure taxpayers receive the best possible deal on 
pharmaceutical coverage.
    I yield back the remainder of my time.
    Chairman Waxman. Thank you, very much, Mr. Yarmuth.
    Next, I want to call Mr. Sarbanes.
    Mr. Sarbanes. Thank you, Mr. Chairman. I appreciate your 
holding this hearing today on pharmaceutical pricing, 
particularly as it affects Medicare, Medicaid, the so-called 
340B programs.
    Mr. Chairman, I had the opportunity for almost two decades 
to work in the health care industry representing a lot of 
providers in Maryland and much of that was with respect to 
issues of reimbursement. And I know that there is nothing--
there is nothing more opaque than pharmaceutical pricing.
    The background memo, Mr. Chairman, that you circulated 
relates correctly, for example, that the rebate amount for the 
Medicaid program is 15.1 percent of the average manufacturing 
price of the drug or, if it results in a lower net price than 
Medicaid, the difference between the average price and the, 
quote, best price at which the manufacturers sells.
    The problem is that nobody really knows what the average 
manufacturer price is, and nobody really knows what the best 
price is. So there's a lot of manipulating that can go on.
    Why does this matter? It matters because there are huge 
savings that we could realize if we could get a real fix on 
what the pricing is in this industry. And I, like many, see an 
increased role for the Medicaid program in health care reform 
as we go forward. So it is important to nail down what this 
pricing environment is.
    Finally, Mr. Chairman, 2 weeks ago we gave the Secretary of 
Health and Human Services the right to negotiate lower drug 
prices on behalf of Medicare beneficiaries. The ability of the 
Secretary to do that effectively will depend again on us 
understanding clearly the way pharmaceutical pricing works.
    So I look forward to the panel's testimony, and I thank you 
for the hearing.
    Chairman Waxman. Thank you very much, Mr. Sarbanes.
    Mr. Welch.
    Mr. Welch. Thank you, Mr. Chairman and ranking member, for 
calling this hearing.
    The pharmaceutical industry does two things extremely well. 
The first is that they create drugs that extend life, alleviate 
suffering and, in some cases, cure disease; and for that they 
are to be applauded. The second thing they do extremely well is 
rip off consumers and taxpayers.
    It is quite astonishing that the power of this industry was 
so successful that last year they actually got injected into 
law a provision that prohibited price negotiation. It is 
shocking. It is appalling. And, as my colleague from Maryland 
said, the House of Representatives just passed legislation to 
rescind what is a disgrace to the American public and the 
American taxpayers to which the pharmaceutical industry should 
apologize.
    We in Vermont watched in dismay as the price of 
prescription drugs went out of sight, making it very difficult 
for people who need the life-saving, pain-relieving, life-
extending promise of good prescription medication go beyond 
their ability to pay; and we acted, as did many other States, 
Mr. Chairman, by requiring price negotiation with 
manufacturers, working with other States to create purchasing 
pools to lower the price, providing for prescription drug 
formularies, to allow price drug importation from Canada. These 
initiatives saved the Vermont taxpayer millions and millions of 
dollars literally; and, in many cases, we, as I said, work with 
other States.
    Now, I believe that it is absolutely essential to the 
American taxpayer and the American consumer that we have fair 
pricing and fair policies with prescription drugs. The industry 
is important because it does do something that is essential to 
meeting the medical needs of our people. But they cannot hide 
behind the fact that they are providing an important service as 
the justification to use their market power and their political 
power to rip us off. It's got to end, and I believe that this 
hearing is going to help expose the abuse of that market power 
that this pharmaceutical industry has so that we can bring this 
back to balance and have fair profits and fair policies that 
are going to benefit the American consumer and the American 
taxpayer.
    Thank you, Mr. Chairman.
    Chairman Waxman. Thank you very much, Mr. Welch.
    The committee will now receive testimony from the witnesses 
before us today, and I want to introduce our first panel: Dr. 
Stephen Schondelmeyer, professor at the University of Minnesota 
College of Pharmacy, previously from Kentucky, I learned today; 
Dr. Gerard Anderson, professor at the Johns Hopkins Bloomberg 
School of Public Health; and James W. Moorman, president and 
CEO of Taxpayers Against Fraud.
    It is the policy of our committee to swear in all 
witnesses. You are not being singled out. All witnesses are 
sworn in. So I would like to ask you to rise and raise your 
right hands.
    [Witnesses sworn.]
    Chairman Waxman. The record will indicate that each of the 
witnesses answered in the affirmative.
    We are going to start with Dr. Schondelmeyer, if you would. 
All of your prepared statements will be in the record in its 
entirety, and we would like to ask you if you would try to keep 
it to around 5 minutes.

 STATEMENTS OF STEVEN SCHONDELMEYER, PHARMD, PH.D., PROFESSOR 
AND HEAD, DEPARTMENT OF PHARMACEUTICAL CARE AND HEALTH SYSTEMS, 
    UNIVERSITY OF MINNESOTA COLLEGE OF PHARMACY; GERARD F. 
  ANDERSON, PH.D., PROFESSOR, DEPARTMENT OF HEALTH POLICY AND 
     MANAGEMENT DIRECTOR, CENTER FOR HOSPITAL FINANCE AND 
 MANAGEMENT, JOHNS HOPKINS BLOOMBERG SCHOOL OF PUBLIC HEALTH; 
  AND JAMES W. MOORMAN, PRESIDENT AND CEO, TAXPAYERS AGAINST 
                             FRAUD

               STATEMENT OF STEVEN SCHONDELMEYER

    Mr. Schondelmeyer. Thank you, Mr. Chairman, and thank you, 
committee members, for including me on your panel today.
    The pharmaceutical marketplace is a market that I have 
studied for about 30 years now and I find it extremely 
fascinating and dynamic.
    First, let me apologize. Due to the relatively short nature 
of my timing and getting involved with this, I don't have a 
written statement now. But I will provide one shortly after the 
hearing to the committee at the committee's office.
    I always like to step back and remind us, as many of the 
Members have, of the value and the role of pharmaceuticals. 
First, and quickly, half of all working adults, three-quarters 
of all elderly use one or more prescription medicines every 
week. If we look at any type of medicine, including over-the-
counters and herbals and other supplemental types of medicines, 
three-fourths of working adults and 9 out of 10 elderly use a 
prescription or some type of medicine every week. So virtually 
everyone uses prescription medicines. There is a universal 
demand for prescription drugs.
    Second, I often hear and see in many policy journals and 
academic journals and government reports a quote that drugs are 
a small part of health care, and the number they quote is drugs 
are 11 percent of the health care dollar. That number is 
accurate. It comes from the Office of the Actuary, and the 
Office of the Actuary very carefully defines that to mean drugs 
in the outpatient prescription market.
    Now, if you understand where I am headed, that isn't all 
drugs in society, but we use the number as if it was. And I 
have tried to dig behind and done some estimates of what drugs 
in all of our national health expenditure accounts really 
represent. They represent today closer to 18 or 19 percent of 
the health care dollar, and by the year 2014 or 2015 we expect 
drugs to be more than 25 percent of the health care dollar.
    Now, again, let's put that in perspective. If we look at 
drugs as a part of the total economy, today drugs are about 4 
percent of our total economy. By 2014, 2015, they will be about 
5 percent of our total GDP. That is a much bigger factor than 
we give them credit for.
    So let's first quit minimizing drugs as a small part of 
society. And I don't say that to say that is good or bad, but 
it is reality, and let's start using real numbers.
    That brings me to my first recommendation.
    I would recommend that you ask the Office of the Actuary to 
create a parallel estimate of drugs in all of society and in 
the total national health accounts and not just the outpatient 
number that we keep using and fooling ourselves that drugs are 
a small part of health care. Because, without knowing the real 
total amount that is spent on drugs, we don't put it in a very 
appropriate policy perspective.
    Second, they should subdivide that into how much is being 
paid for by government, Federal, State and other levels of 
government versus private sources. As best I can tell, drugs 
are really more than half of the--more than half of paid for by 
government today and not the private market.
    I realize a statement was made earlier that the private 
market really manages more drugs. They may manage them, but 
Medicare is paying them to manage those. If we count the 
financing source for drugs, government is the largest payer for 
prescription drugs in the marketplace today, and we need to 
understand that number and understand what it means.
    So let's put drugs in their right perspective, first of 
all.
    There have been a number of major changes that have 
occurred to the pharmaceutical market place in just the last 
few years. The Medicare Part D program in many ways is very 
helpful. It helps a lot of seniors that didn't have drug 
coverage. But it also creates some issues.
    Second, there have been shifts of the dual-eligibles from 
the Medicaid, the State-run programs, to the Federal program. 
And when you make that shift of dual-eligibles you shift them 
out of the Medicaid program that had the drug rebates. The 
amount, as best I can tell from looking at the prices on the 
Web sites, from Medicare is being paid by Medicare for seniors 
that are dual-eligibles is 20 to 30 percent higher than it 
would have been if those patients remained under the current 
Medicaid rebate program.
    Which brings into question why did we move patients to a 
system that costs us more as a government? And, no, that prices 
haven't gone down for most drugs to account for that, even in 
the private system. And certainly even if the premiums may have 
held even or gone down slightly, it isn't enough to account for 
20 to 30 percent change in drug spending.
    Another change that occurred is the Deficit Reduction Act 
of 2005 that made significant changes in pharmacy payment under 
Medicaid. That act included redefining the average manufacturer 
price and some proposed rules that have recently come out with 
respect to that average manufacture price redefinition. Those 
rules I think do improve the definition of average manufacturer 
price from their perspective of a basis to calculate rebates 
that manufacturers owed to Medicaid.
    What that act also tied the AMP to was how pharmacies at 
the retail level will be paid for their prescription drugs. And 
I think that the new definition of AMP actually is not 
necessarily a substantial improvement in determining actual 
prices to retail pharmacies because pharmacies don't purchase 
direct from manufacturers. They purchase through wholesalers. 
They have other costs in the system. We are trying to use one 
number to do two things that are different, and we need to make 
adjustments in that.
    I think we also have recognized in the private marketplace 
that the list price systems of average wholesale price and 
wholesale acquisition costs that we have used for 30 or more 
years I have seen as I grew up in this marketplace those list 
prices create problems and create overpayments in government 
programs, they create overpayments in private programs, and 
they need change. We need better transparency and/or regulation 
of both manufacturers in the drug price data base systems that 
list those prices so it doesn't continue to create that type of 
fraud.
    What do we need to do ahead? I think--several 
recommendations, including I think you must continue to monitor 
the ways that fraud and abuse can occur. We have fixed some of 
those with the new Medicare program with the Medicaid Deficit 
Reduction Act. But anytime you make changes the market is also 
very dynamic and innovative with respect to pricing, and they 
will find my new ways to create fraud and abuse, and you have 
to monitor for that.
    You need to encourage--to create the GAO and the Office of 
the Inspector General and GAO to be ever vigilant and to fund 
them adequately. You need to make price data bases and 
transaction data bases transparent and available to both 
government and private policy researchers and academic policy 
researchers so we can continue to develop new payments, not 
just find fraud. Just finding and fixing fraud doesn't mean you 
have developed an appropriate payment system. So we need to 
define appropriate positive incentives, performance-based pay 
for manufacturers and for pharmacists and for the 
pharmaceutical distribution system, not just for physicians, as 
we have done.
    I will wrap up by saying the Medicaid drug rebate program 
still needs some attention. I don't think--I have heard some 
propose eliminating the rebate program or converting it to just 
a fixed flat rebate, and that doesn't solve the problem. In 
fact, it would take away some very important tools. I think it 
is important you keep the tools of the best price, which is 
market based in that calculation, inflation adjuster is rarely 
talked about but one of the most important tools in the 
Medicaid rebate. You must keep that because it is market based 
and not just a government regulation per se, and you have to 
keep that in, I think.
    And you need to keep in a provision like the State-
negotiated supplemental rebates because, again, it allows the 
innovation of the States to develop different approaches and 
different ways of creating things.
    Chairman Waxman. Thank you very much, Mr. Schondelmeyer. We 
will get to some of these other points in the question and 
answer period.
    [The prepared statement of Mr. Schondelmeyer follows:]

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    Chairman Waxman. Dr. Anderson.

                STATEMENT OF GERARD F. ANDERSON

    Dr. Anderson. Mr. Waxman and members of the committee, 
thank you for inviting me to testify this morning.
    My analysis suggests three things: First of all, few 
government programs actually know the prices that they pay for 
drugs; two, different government programs are paying very 
different prices for exactly the same drugs; and, three, Part D 
plans are paying substantially higher drug prices than most 
other government programs.
    In light of these findings, I have three recommendations 
for the committee to consider.
    First of all, each government program should know the 
prices--the actual prices--that it pays for specific drugs. 
Second of all, drug prices should be compared across the 
government programs to determine which programs are paying the 
highest and which are paying the lowest prices for specific 
drugs. And, third, Congress should consider a more consolidated 
approach to purchasing drugs that would eliminate some of the 
disparities across these programs.
    In my written testimony, I discussed several reasons why 
HRSA does not know the prices it is paying for 340B programs 
and CMS does not understand the prices that Medicaid programs 
are paying for drugs. Given that some States pay five times 
more for drugs than other States, I think greater understanding 
of Medicaid prices by CMS is needed.
    However, in my oral testimony I want to focus on the 
Medicare Part D program. Surprisingly, the Secretary of HHS, 
the CMS actuaries, CBO, CRS, GAO, etc., do not know the prices 
that the Part D plans are actually paying for drugs.
    The raw data that is available is CMS headquarters simply 
has not been analyzed. It will be interesting for me to compare 
the data that Mr. Waxman and Mr. Davis has requested to see if 
they give you exactly the same numbers.
    Chairman Waxman. Can you pull the mic a little closer?
    Dr. Anderson. The Secretary of HHS should compare the 
lowest prices that any Part D plan is paying for the drugs to 
the prices that Medicaid or VA or Canada are paying for the 
same drug.
    Mr. Davis, maybe the market is working. We should just know 
this.
    Without actual data on the prices that Part D plans are 
paying, it is impossible to definitively say if the Part D 
plans are paying the highest rates. However, many organizations 
have tried to compare the rates that various government 
agencies pay, and the States have consistently found that the 
Part D plans are paying the highest rates.
    For example, in 2005, CBO estimated the average price paid 
by the Medicaid program and the 340B programs were 51 percent 
of the average wholesale price and that VA was paying 42 
percent of the average wholesale price. The same CBO report did 
not estimate the reduction Part D plans were receiving. 
Therefore, I had to turn to the CMS actuaries for additional 
data on Part D plans. In their 2006 report on the projected 
costs in the Part D program, the CMS actuaries assumed that 
Part D plans will pay 73 percent of the average wholesale 
price. First, it should be noted that the average price 
reduction obtained by Part D plans is 22 percent less than what 
Medicaid or the 340B programs have attained and 31 percent less 
than the VA.
    So what does this mean for Medicare spending? The Medicare 
actuaries forecast that the Medicare program will spend $1 
trillion on Medicare Part D over the next 10 years. And 
remember when they promised you how much it would cost 
originally they said $400 million. So it is now $1 trillion. 
The 22 percent reduction in price is associated with a $200 to 
$300 billion savings in the Medicare program over 10 years.
    Second of all, the CMS actuaries do not project that the 
Part D plans obtained any further price reductions from two 
pharmaceutical companies. In fact, the CMS actuaries project 
Part D expenditures will increase an average of 10.3 percent 
per year over the next 10 years; and this is much faster than 
the CMS actuaries project Part A or Part B to increase over 
this same time period.
    So with the information on the relative prices the various 
government agencies are paying for drugs, Congress should 
examine three questions.
    First, are the price variations across the government 
agencies for all drugs? Are they the same or do they vary by 
certain types of drugs? The theory and limited data suggest 
that government agencies are probably paying similar prices for 
generics and widely different prices for brand names.
    Second of all, what explains the variation in price? The 
most likely explanation is that different government agencies 
use different approaches and some approaches are more effective 
than others.
    And, third of all, should the government consolidate its 
approach for purchasing drugs? I really do have trouble 
understanding why certain government agencies should pay more 
for drugs than other government agencies.
    For example, why should the Medicare program pay more for 
drugs than the VA for exactly the same drugs? Unless there is 
good reason why one government program should pay a lower price 
than another government program, I think the Congress should 
consider a common approach for the government to purchase 
drugs.
    Thank you for the opportunity to testify this morning.
    Chairman Waxman. Thank you very much, Dr. Anderson.
    [The prepared statement of Mr. Anderson follows:]

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    Chairman Waxman. Mr. Moorman.

                 STATEMENT OF JAMES W. MOORMAN

    Mr. Moorman. Thank you, Mr. Chairman.
    The Federal Government is spending hundreds of billions of 
dollars to fund Medicare, Medicaid and other health care 
programs. It is essential that as much as possible be done to 
ensure that these funds are not lost to fraud but are spent on 
purchasing the health care services for the more than 90 
million Americans these programs serve.
    One particular area, fraud by pharmaceutical companies 
against Medicaid, is ripe for effective anti-fraud action. 
Whistleblower cases under the False Claims Act have brought 
three types of fraud into view that are costing Medicaid many 
billions of dollars: Medicaid best price fraud, average 
wholesale price fraud and off-label marketing fraud.
    One of the biggest, if not the biggest, is best price 
fraud. There are several ways to cheat the best price rules 
which, in their simplest terms, require drug manufacturers to 
pay specific rebates on drugs sold to Medicaid or, 
alternatively, the best price given to other customers, 
whichever is lower.
    Now one way to cheat is to simply not report the discounts 
that would increase the amount of the rebates to Medicaid. 
Another way is to give unreported kickbacks to big customers. 
Sometimes these kickbacks are in the form of special fees for 
reported services, such as data fees, or they could involve the 
shipment of large quantity of, quote, free samples to the 
customer. A third form of cheating--sometimes called lick and 
stick--is to mislabel the drugs in the name of another entity 
with a distinct national drug code number that is not bound by 
the best price rules.
    So far, there have been 16 settlements of cases involving 
these frauds that have recouped nearly $4 billion in civil 
damages and criminal penalties from drug manufacturers. There 
are more than 180 additional unresolved cases. The potential 
liability involved has not been reported, but, based on the 
cases settled to date and what is known about the unresolved 
cases out from under seal, it is likely to be in the $60 
billion range.
    There's a serious danger that the Justice Department will 
be unable to resolve most of these cases in a timely and 
satisfactory manner, despite the fact that the lawyers handling 
these cases work hard and are very good lawyers. The reason is 
the lack of resources in top-level leadership.
    These cases are being resolved at the rate of less than 
three a year. Many cases are over a decade old. There is a 
serious inadequate number of lawyers assigned to the cases. 
Only a few U.S. Attorneys Offices are seriously involved. Money 
allocated from the Health Care Fraud and Abuse Control account, 
sometimes called the HCFAC account, for health care fraud cases 
seems to have been withheld.
    Indeed, the U.S. Attorneys appear to be getting only a 
third of the $30 million allocated to them for this purpose, 
and the civil division receives only a varying fraction of a 
$14.5 million allocation.
    Support from investigative agencies is spotty. The active 
support of the Attorney General and his deputy are not in 
evidence. The drug manufacturer defendants are aware of these 
deficiencies, and many of them appear to be trying to run out 
the clock on the Justice Department's attorneys.
    These problems are particularly frustrating because the 
entire set of cases provide the government with an opportunity 
to close a multi-billion-dollar fraud gap. That would be the 
difference between fraudulent conduct that has occurred and 
fraudulent conduct held to account.
    In order to grasp this opportunity, however, the Department 
of Justice must alter the status quo of how it is pursuing 
these cases. The top officers of the Department must take an 
active interest in the cases, adequate resources must be 
deployed and should be deployed quickly, HHS must provide more 
support, full support by investigative agencies is mandatory, 
the Civil Division's fraud section needs to be augmented, more 
U.S. Attorneys Offices must participate in these cases in a 
significant way, and action must be taken to prevent these 
cases from languishing or allowing the clock to run out on 
them.
    That completes my oral testimony, Mr. Chairman. I want to 
thank the committee for this opportunity to testify.
    [The prepared statement of Mr. Moorman follows:]

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    Chairman Waxman. Thank you, all three of you, for your 
testimony.
    We have two models in effect. Medicaid has paid for drugs 
by establishing limits. The government establishes limits, 
either the best price or a specified reduction in the price of 
drugs. That means the lowest price that is charged for the drug 
anywhere will be charged for the Medicaid program. And, Mr. 
Moorman, you outlined a lot of problems where there could be 
abuse by the drug manufacturers to avoid actually giving the 
discounts that the law requires of them to give.
    Medicare, on the other hand, is a different model. Medicare 
is supposed to be an open market where consumers and the plans 
will be able to choose; and, in choosing from these different 
plans, that will give an incentive for the plans to hold down 
the price of drugs, a market, supposedly. Now, is there a 
potential for that market-based system to be one where there 
can be fraud and waste and abuse, as we have seen the attempts 
to use the Medicaid program as a way to make the taxpayers pay 
more money under those circumstances?
    Dr. Schondelmeyer, why don't you start? What are the 
potentials? Is it harder or is it easier for abuse in the 
Medicare Part D program?
    Mr. Schondelmeyer. Actually, there is certainly opportunity 
for fraud in both systems. It will take us several years to 
know for sure if it is really more, but I would argue that the 
Medicare ``let it go in the private marketplace,'' ``everybody 
has a different way of doing things system'' is sometimes 
harder to catch fraud in because there are many innovative and 
different types of fraud that can occur and at different 
levels. There is less data, less accountability, less 
information that can be monitored by either government 
officials or the private policy world to evaluate the impact.
    I am not sure when we will see data like we get under 
Medicaid available for the prescription drug plan under 
Medicare. That may be 3, 4, 5 years before we get it as 
researchers. You may get it a little earlier as government. But 
just the delay in getting data in all these systems and 
reconciling it and aggregating it opens up the opportunity for 
fraud.
    Chairman Waxman. Well, we do know that when we had the 
Medicaid program paying for those who were dual-eligible we 
paid a lot less than we are now paying for those same people 
who are under the Medicare Part D program. Dr. Anderson, you 
referred to that. How much more are we paying for those same 
people for their drugs than what we used to pay under the 
Medicaid program?
    Dr. Anderson. It is hard to say exactly how much more we 
are paying, but our best estimate is about 20 percent more. We 
base this on CBO reports, and we base this on filings that are 
at the SEC that are done by the drug companies themselves. They 
essentially tell us that, because of the Medicare program, they 
are having to pay out fewer rebates, they are getting higher 
prices for these dual-eligibles, and that is quite a sizable 
amount of money.
    Chairman Waxman. Well, it is very peculiar, as you pointed 
out, that the government will pay for the same drug at one 
price for the veterans, at a different--probably higher--price 
for Medicaid--not necessarily, could be the same--but when it 
comes to Medicare we could be paying a lot more for that same 
drug. And, of course, if we look at the way the drug is 
marketed in other places, we are paying far more for our drugs 
in this country than people are paying for the very same drugs 
somewhere else. So it seems like there is no real price 
attached to the cost of a drug. It is just whatever the market 
will bear.
    Is the Medicare Part D allowing the market to bear higher 
prices for the taxpayers to pay for those drugs?
    Dr. Anderson. I think it definitely is, and I think the CMS 
actuaries are telling you that they are. When they originally 
did their cost estimates, the CBO told you it was $400 billion, 
the actuaries might have said $500 billion, but the 2006 
trustees report says that in over the next 10 years it will be 
$1 trillion; and all of our estimates suggest that they are 
paying substantially more under Medicare Part D than they are 
paying under any of the other government programs.
    I think that is part of the reason why the new estimate is 
$1 trillion in 2006 and why, essentially, it is Part D is going 
to grow faster than Part A, and it is going to grow faster than 
part D, and it is going to grow faster than Medicaid spending. 
It is because we don't have good control over the spending in 
Medicare Part D.
    Chairman Waxman. A lot of the Republican proposals, 
especially from, I think, the Bush administration, in health 
care is to have more transparency, on the theory people will 
shop around before they go to a hospital and check the prices, 
see what the doctors charge and make a choice between doctors 
based on their prices. That, of course, may work if you have 
time to do it. If you, however, are sick and you need health 
care, you are not going to be able to shop around.
    But the whole premise of some of these high-deductible 
plans is that we want to give incentives for consumers to be 
able to shop around and choose the lowest price.
    What kind of transparency do we have in the pharmaceutical 
area, and if we had greater transparency would that help the 
buyers of drugs, whether they be individuals, insurance 
companies or the government, to make sure we are not getting a 
higher bill?
    Dr. Anderson. As an economist, I believe in markets. I 
think markets work in certain circumstances. But it appears 
that in the pharmaceutical industry they don't work very well 
and so we need to have greater price transparency. We need to 
know what at least the lowest price that any of the Part D 
plans are able to obtain and compare that to the price that the 
VA is paying for that same drug to know whether or not the 
market place is working.
    We can all believe from economic theory that markets work, 
but we really need the data. As Ronald Reagan once said, trust 
but verify. You need to be able to verify that the marketplace 
is in fact working.
    Chairman Waxman. If I were trying to make my decision as to 
which of the--in many cases of the 40-plus plans to choose from 
to cover my prescription drugs under Medicare, would I have any 
idea what any of those plans pay for the drugs that I use?
    Dr. Anderson. You wouldn't have any idea and either do they 
know of what other plans. The other Part D plans don't know 
what the prices are. There is just no price transparency. That 
is precluded from it, and the CBO is precluded from getting 
that data from the Medicare Modernization Act of 2003.
    Chairman Waxman. Mr. Moorman, maybe you can answer this, 
but maybe one of the other members of the panels can. So I am 
trying to decide between different plans under Medicare. I 
don't know what they are actually paying under each plan for 
the drugs I use. The only thing I can choose from are the--the 
amount that the plans want to charge me and different 
deductibles and premiums, and sometimes they cover my drug, and 
sometimes they may not.
    How is that--does that market lend itself to more fraud 
because we don't know whether there are kickbacks going on with 
these plans? Does it lead to more fraud because they don't know 
what they are paying for, the drugs themselves, and some of the 
other things that you have explored and the fraud cases?
    Mr. Moorman. I think there are many opportunities for fraud 
in that system. For example, PBM that is managing the drugs 
could dispense a cheap generic drug, but charge the insurance 
policy for a more expensive drug that does the same thing.
    And where you have the manufacturers, the PBMs and the 
insurance, you have many sort of ways in which you can hide 
things and charge the insurance policies far more money, which 
in the long run will cost the program more.
    And the insurance companies themselves can play games with 
things like enrollment, and I predict you will see this in due 
course. For example, they could enroll someone in August, but 
report they enrolled him in May; or if he leaves their policy, 
they could keep him on their rolls to collect additional 
premiums for an additional 3 or 6 months. There are plenty of 
ways in a complicated system like that for the parties to 
inflate their charges to somebody else, and ultimately it is 
the program that pays this.
    Chairman Waxman. Dr. Schondelmeyer, I want to ask you this: 
The drug companies tell us they have to keep their pricing 
secret because they have to maintain their competitive 
positions in the market, this is proprietary information, and 
therefore, it is their right to keep this secret. How do you 
respond to that argument by the drug companies?
    Mr. Schondelmeyer. Well, I believe the markets work better 
with information, including price information, made 
transparent. If I am a consumer and want to get a better 
airfare to Washington, DC, I go on line and look at different 
courses and look to see what the prices are.
    I think in the pharmaceutical market, I think the market 
works different than a lot of other markets. So really the 
manufacturer-level and the retail-level prices aren't 
necessarily indicative of each other. The only transparency we 
have so far is purported retail prices by the prescription drug 
plans posted on their Web site. We have no way of verifying if 
that's the actual charge being charged to Medicare, and how 
much the manufacturer actually charged the prescription drug 
program or pharmacy, and how much rebate was paid, and what 
impact those rebates had. Rebates, really, in the private 
market, I'm not--I'm not talking about Medicaid, but in the 
private market have become an institutionalized form of 
kickback that in some cases result in prescription drug 
programs encouraging more use of higher-price drugs because 
they get more rebates that they convert into profits and don't 
necessarily always pass on in lower price or lower premiums. 
And we don't have any way of tracking that because it's all 
hidden.
    If we don't open up the black box, I think we are open to 
much more fraud.
    Chairman Waxman. Is that fraud, or is that just a business 
practice?
    Mr. Schondelmeyer. I think we are open to both; more fraud 
within it and higher prices due to inefficient business 
practices.
    Chairman Waxman. Dr. Anderson.
    Dr. Anderson. One of the things that I am particularly 
concerned about, if a Medicare beneficiary signs up with a plan 
based upon a set of prices, the Part D plan can then change 
those prices the next day, and you have made a decision based 
upon one set of prices, and then you are looking at a totally 
different set of prices a day or a week later when you develop 
it, particularly on this. I don't know if that is fraud, but I 
think it's a serious thing that Congress should take a look at.
    Mr. Schondelmeyer. Classic bait and switch that sometimes 
is fraud.
    Chairman Waxman. Mr. Davis.
    Mr. Davis of Virginia. Thank you very much.
    Mr. Chairman, I would like to enter into the record a 
letter from the Secretary of the Veterans Administration, Mr. 
R. James Nicholson, dated January 11th, to Speaker Pelosi. In 
it he notes that it is important to recognize that the VA of 
the Medicare Part D program differ significantly with their 
constituencies, strategies, and structures.
    The pharmaceutical manufacturers, well, VA's integrated 
health care system facilitates the provision of pharmaceutical 
care for prescriber to dispenser to veteran. The fully 
integrated structure, along with the use of VA's electronic 
health records, supports an effective formulary management 
process and must allow the VA to be able to provide the highest 
quality of health care to veterans and monitor their progress.
    But I think the entire----
    Chairman Waxman. Without objection, the letter will be made 
part of the record.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T5340.068
    
    [GRAPHIC] [TIFF OMITTED] T5340.069
    
    [GRAPHIC] [TIFF OMITTED] T5340.070
    
    Chairman Waxman. Dr. Anderson, let me start with you. I 
want the same information Mr. Waxman does. It is a question of 
how you best get it, and we are going to get it and figure it 
out, and hopefully we can have a reasoned debate once we get 
that.
    In your opinion, are the costs of Medicare Part D higher or 
lower than the cost estimate made when the act was passed?
    Dr. Anderson. If I look at the 2006 trustees report right 
now, and I look for the 10-year period from 2006 to 2015, and I 
add up the numbers, it's $1.013 trillion. When you passed the 
legislation, there was the large debate over how much it would 
cost, and CBO said $400 billion, and the actuaries, I think, 
were really saying about $500 million. So that is twice as much 
or two and a half times as much.
    Mr. Davis of Virginia. But the initial was for the first 10 
years of the program. You are taking 10 years, and for the 
first 2\1/2\ years the program wasn't in effect.
    Dr. Anderson. Correct.
    Mr. Davis of Virginia. You are taking basically a 7-year 
program and applying it to a 10-year program, and you've added 
beneficiaries because of the retiring baby boomers.
    Dr. Anderson. There is some differences in years. I totally 
agree with that. But I still think the estimates are 
substantially higher than they were when the CBO did its 
initial estimates.
    Mr. Davis of Virginia. Have Medicare A and B, which 
incorporate government price control, succeeded in controlling 
health care costs?
    Dr. Anderson. They haven't done a great job, but they are 
doing better than Part D is doing, according to actuaries.
    Mr. Davis of Virginia. Have their costs grown in line with 
overall inflation?
    Dr. Anderson. No.
    Mr. Davis of Virginia. You say the CMS actuary, as we noted 
in openings, the average premium's going down, isn't it, next 
year, for Medicare Part D?
    Dr. Anderson. I am looking at the 2006 trustees report and 
looking at total expenditures and seeing that they are growing 
on average 10.3 percent per year from 2006 to 2015. For me is 
not evidence that the prices are going down.
    Mr. Davis of Virginia. As you just--I think we just 
concluded you are looking at 10-year differentials where 3 
years of the first year differential there wasn't any cost in 
it, and now you have retirement.
    Let me move ahead. I have seen comparisons between the 
prices paid by VA for certain plans and prices paid by Medicare 
plans. First, there was an article in USA Today that talks 
about drugs that are not available under the VA plan. In fact, 
they listed the top 20 drugs under Medicare Part D and the VA. 
Celebrex patients have to first fail on older achieving drugs 
to even be eligible. Lipitor isn't available at all, one of the 
most widely used drugs in the market. And Nexium is not 
available at all. Prevacid--I am not sure how you pronounce 
it--is not available at all. Xalatan is not available at all.
    The theory of this plan was to allow people choices. If you 
don't need one drug, it is not contained in there. You don't 
have to buy a program that is chock full of drugs you don't 
need. And you can try to find one, and it's probably more 
complicated than anyone anticipated when it started, but 
overall you pick the plan that is best for you as opposed to 
kind of a one-size-fits-all formulation.
    Now, VA prices cited in comparisons are actual wholesale 
prices; isn't that correct?
    Dr. Anderson. Yes. In the CBO report, yes.
    Mr. Davis of Virginia. The prices are cited for Medicare 
from the CMS plan finder Web site which--is that correct?
    Dr. Anderson. That is not what I was using. I was using CMS 
actuarial numbers.
    Mr. Davis of Virginia. But those are overall numbers. Those 
are not available plan to plan.
    Dr. Anderson. Unfortunately they are not.
    Mr. Davis of Virginia. I think that is the key. What I am 
trying to analyze--that is what makes it so difficult to 
analyze. You may have one group in putting together a plan 
decide to give reductions here and raise it here to be able to 
attract a clientele, and it makes it very difficult. So of 
course you are going to pay more in one area than another. 
Grocery stores are competitive, but I go to Safeway and I pay 
one price for Diet Coke, and I pay another at Giant. That is 
the difficulty here of comparing apples to apples is why the 
government would be paying more under one plan than another.
    Dr. Anderson. I understand that completely. What I am 
looking for in the Part D plan is the lowest price that any of 
the Part D plans are able to negotiate for each one of the 
individual drugs. So if the marketplace is working, it should 
work in getting low prices for Celebrex in one of the Part D 
plans.
    Mr. Davis of Virginia. What you're saying, they should have 
the lowest price for everything in every plan, and that is not 
the way marketing is.
    Dr. Anderson. I am looking for all of the Part D plans what 
is the lowest price that the marketplace can obtain and compare 
that to the VA price. I am not looking for all of the Part D 
plans. I am just looking for the lowest price.
    Mr. Davis of Virginia. I understand in putting in 
packaging, which is what you are doing in this kind of case, 
you are going to get variances, and that is good for the 
consumer in a sense. Not everybody is going to take the lowest 
price for everything and just stick it together. That is not 
how you get competitive and give people choices. You agree with 
that?
    Dr. Anderson. Absolutely.
    Mr. Davis of Virginia. It's difficult when we make sweeping 
changes to understand that the marketplace works different than 
everybody taking the lower cost, and you either believe it or 
you don't. You will find a greater suspicion of the marketplace 
with some members than with others. I don't always like the 
verdicts of the marketplace, but I respect the efficiencies 
that it brings and sometimes the unintended consequences.
    We need to tamper in a way we don't understand. But what we 
are trying to find today is ways with the--particularly the new 
plans where we know people will find ways to find fraud and the 
like. It's a new plan. We don't know yet what that is going to 
be. And I think we all agree that we want to continue to 
market--I mean, to analyze what that will be, and I think all 
of you agree on that and continued scrutiny from GAO to find 
out what scams will come forward, and they do in all of these 
areas. And Medicare Part D is so new, it is difficult to 
pinpoint; is that a fair comment?
    Dr. Anderson. Yes.
    Mr. Davis of Virginia. Dr. Schondelmeyer.
    Mr. Schondelmeyer. I think we identify answers in places it 
might occur. We talked about the rebates, and it is not 
required that they may be passed on as lower prices to the 
consumer either in prescription price or in premium. It is not 
required. It may be used to increase or enhance the profits of 
the prescription drug plan, and they may--they have really a 
perverse incentive sometimes to increase the use of higher-
priced drugs to the detriment of the consumer or us taxpayers. 
So I think the hidden rebates are a concern for fraud already.
    Mr. Davis of Virginia. Let me ask you, I think you are a 
little more suspicious of the competitive pressures driving 
down costs, is that fair to say, on the Part D?
    Mr. Schondelmeyer. I am suspicious partly because what we 
know is nobody really makes the ultimate price value decision 
in the Medicare price program. I have spent a lot of time doing 
focus groups and interviews, and we are conducting a survey 
right now of seniors who have might have these choices, and 
their primary driving factor is the premium alone, or the 
premium and the deductible and/or are my two or three drugs 
that I am on right now on there; but when they change, find out 
they change to a different drug, it is not covered, or it's 
higher price, and the program changes over time, so it ends up 
costing them more.
    Mr. Davis of Virginia. But you always find that. People are 
constantly making adjustments in the marketplace.
    Dr. Anderson. It is not a very good, efficient system.
    Mr. Davis of Virginia. Many argue the success of the 
competitive system demonstrated by the fact that the monthly 
premium has dropped from the estimated costs of $38 to $23 and 
now down to $22 at a time when everything else is going up. How 
do you explain that?
    Mr. Schondelmeyer. Because the cost is coming in either 
adjustments in the program, higher deductibles, the amount they 
charge for copays, or the way they charge them in the system, 
the amount of rebates that they get from the manufacturers for 
pushing higher-priced drugs. All of those could explain lower 
premiums and higher costs of the system, even under the current 
program.
    Mr. Davis of Virginia. I think if you take a look at the 
monthly and the copays and the monthlies and everything else, 
that they are actually much lower than the inflationary cost. 
Maybe it is first year. I also think that as a lot of seniors 
in first selection may be getting a program that doesn't quite 
suit them, they were pushed in because of advertising, but over 
time, as they become better educated, hopefully that will drive 
prices down as well.
    The plan competition, in my opinion, works for medical Part 
D the same way it works for Members of Congress, congressional 
staff and the 8.3 million other Federal employees covered by 
FEHBP. Private plans, pharmacy benefit managers have 
significant experience driving things, and, you know, overall, 
I think we are going to need more data over the next 2 or 3 
years, and we can continue to come back and look at this.
    Mr. Schondelmeyer. I would point out that Members of 
Congress and employees don't chose their program, and their 
employers choose them, and they spend a lot of time and effort 
in analyzing----
    Mr. Davis of Virginia. Actually, that's not correct. We 
choose our own plan.
    Mr. Schondelmeyer. Within a small step that's been 
carefully designed by government.
    Mr. Davis of Virginia. It's not two or three plans. It's 
literally dozens of plans that we have to select from. So it is 
a quite a few plans that they have, not one or two.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Tierney.
    Mr. Tierney. I was struck by the fact there are only a few 
Members of Congress in their eighties or nineties that might 
have to deal with the confusing aspects of this.
    Just to go back to one point, when the comment was made to 
individuals when they find the prescription drug was appointed 
to them changes the set-up for the plan, that they could just 
make an adjustment. That is not entirely accurate that they can 
make an adjustment on the spot. Don't they have to wait a 
certain period of time before they have the opportunity again?
    Mr. Schondelmeyer. With the way the plan is structured, 
they are locked into that plan for a year, and they can't 
change to a different plan. And the next year they don't know 
the certainty that drug will be there and will be covered for a 
year.
    Mr. Tierney. I hear they are stuck for a period of time, 
and it's so confusing the first time, they're reluctant to 
change at all. You go through the process again.
    Dr. Anderson. You are dealing with the most vulnerable 
people. They have a new illness, And now all of a sudden they 
are faced with a drug plan that isn't covering that particular 
new illness, or that doctor tells them that this drug used to 
work for you, it used to work, but it doesn't work anymore, and 
you need another drug, and that drug's not on your formula.
    Mr. Tierney. Proponents of this Medicaid Part D, they have 
been prescribing lower than expected cost estimates and drug 
plan previews of the program. They then contend that this 
provides evidence of drug plans and negotiating discounts. Is 
that actually true? Is that what is happening here, or is it 
primarily that there is lower enrollment?
    Mr. Schondelmeyer. There is lower enrollment. There are 
slightly lower premiums, but as was pointed out by a Member 
earlier, you have to look at the whole package, and if you look 
at the whole package, as has been pointed out by Dr. Anderson, 
I don't believe the total cost is lower. It is higher than what 
was previously expected.
    Mr. Tierney. In 2007, did the individual Medicare Part D 
premiums increase?
    Dr. Anderson. In many cases they, in fact, did.
    Mr. Tierney. How large?
    Dr. Anderson. Some of them went from $1 a month to $10 a 
month. Some of them weren't that big of an increase, but many 
of them increased.
    Mr. Tierney. So is it true that the drug prices are higher 
than the VA's in many instances?
    Dr. Anderson. We don't know the data. If we knew the data, 
we could answer that definitively, but the best answer that we 
have with incomplete evidence that we are paying--the Part D 
plans are paying substantially--the Part B plans are paying 
substantially higher prices than VA.
    Mr. Tierney. I don't know for the record that was 
introduced into the committee, but the subcommittee to 
veterans' affairs had hearings up in my State, and then the 
Secretary Mr. Principi testified very clearly that savings 
would be more substantial if the procurement process of 
Medicare Part D more closely resembled that of the Veterans 
Administration. So it depends on time there.
    If we look at those findings that cost more than--the VA 
pays more than what it costs in Canada, more than it costs at 
Costco's, drugstore.com, is there any convincing evidence that 
you gentlemen can cite that the Medicare plans were able to 
obtain low prices from drug manufacturers?
    Mr. Schondelmeyer. I don't see it in the prices that they 
post to Web sites for the most part. You can find two or three 
drugs that you can find to be the case. But I have had graduate 
students taking data off the Web sites every week since the 
first day of the program last year across 50 drugs, across 
every plan available in about 10 different markets across the 
country, and we don't see evidence of widespread price 
reductions.
    Mr. Tierney. I want to close and get this in if we can. The 
President put out a budget last week. In it he contained a 
provision that I am finding difficult to understand. He 
proposes in fiscal year 2008 to eliminate the best price 
provision for Medicaid law. Good idea or bad idea?
    Mr. Schondelmeyer. Bad idea because it is one of the few 
market-based functions in that program. The best price is set 
by the market, and it keeps the amount of rebates having a 
market base to it.
    Mr. Tierney. Mr. Moorman.
    Mr. Moorman. I agree.
    Mr. Tierney. So there is no rationale for eliminating 
entirely and giving way to the pharmaceutical industry.
    Mr. Moorman. A lot of them haven't been paying the best 
price, and this is the best way to wiggle out of it.
    Chairman Waxman. Thank you, Mr. Tierney.
    Mr. Bilbray.
    Mr. Bilbray. I have to admit I sort of feel I am in a time 
warp here. I left Congress in 2000, and I had sort of taken the 
attitude then--or the discussion that was going on when Mr. 
Waxman and I served on Energy and Commerce working on health 
issues, I would almost think that is some kind of weird 
parallel universe. The Republicans are talking about quality 
and service, choice to the consumer and the related increased 
costs, and the Democratic Party is talking about savings, 
cutting, bringing it down to the minimum expense in trying to 
reduce that impact.
    And so I am a bit taken aback by the discussion, but I 
think that the one thing comes clear to me. I represent an area 
with some of the highest concentration of veterans anywhere in 
the world: San Diego. Just in our--so when you talk about the 
veterans, I know what my veterans say about their veteran 
program and this new program. And believe me, though I would 
probably have not voted for the Republican proposal a few years 
ago, if I go back now and tell my veterans that I was going to 
eliminate this choice that they have had and they are choosing, 
they would basically be running out with the hangman's knot to 
take care of them.
    So I think, you know, when you look at California where the 
comparison--where you have like 34 access points for veterans, 
but this new program gives over 5,000 access points, I think 
there has to be a consideration that things aren't as simple as 
they may look here.
    But I agree with you that we need to look at the impact on 
those who have made a choice, the consumer who's decided that 
this is a menu with a price tag, and that price tag or that 
menu, the price on that menu, should have some life expectancy 
for the consumer, and I think that is a simple thing that we 
can work on.
    What isn't simple is the fact that when you move the 
different market share and impact on a single industry from 50 
or 34 access units to 5,000 just in one State, there is a 
bigger impact and less of a wiggle room economically for that 
industry than there was with a very small micropart of the 
deal. We are talking about really moving into a huge angle 
here; I mean, a portion of it.
    My question is there is--are we really keeping in our 
minds, too, while we do this there is the elephant in the 
backyard or closet that we are not talking about? Is there an 
industry anywhere in America that spends more percentagewise on 
research and development than the pharmaceutical, biomedical 
research--I mean, do we know if any of them--would anybody try 
to venture? Would we agree that this industry tries to do more?
    Dr. Anderson. I can't answer that question, but I know of 
no other industry that rigs the government more.
    Mr. Bilbray. If you take oil and drilling and those kinds 
of things, then they actually do spend more money on R&D oil if 
you do not consider the issue that you brought up, government 
oversight and regulatory guidelines in the industry, because 
one of the major costs that are in R&D are not specifically 
R&D, but regulatory oversight, which is a major issue.
    My concern when we do this is let's take care of consumers. 
Let's try to take care of the price, but let us always remember 
in the back that there is a huge genie out there that has been 
producing miracles that we take for granted now. And as we try 
to ramp this down, we have to consider if we are talking about 
long-term benefits to the consumer. Wouldn't you agree that we 
have to consider as we do this the long-term impact on 
investment in research and development and the creation of new 
benefits, new drugs not just for the consumer, but for those of 
us in government that would have to pay the price of illnesses 
because we didn't have these breakthroughs? And you seem to be 
the most critical. Do you think we should ignore the R&D impact 
in the long run or make sure we keep those in while we are 
looking into the abuses?
    Mr. Moorman. I am not a specialist in that, but I am 
interested in the taxpayers as I am the consumer, and I don't 
want him ripped off.
    Dr. Anderson. I think if you look at the numbers, R&D 
represents 12 to 15 percent of their expenditures. It is not 
like it's 50 percent. And it is their lifeblood, and we 
certainly need to know it. The question is who should pay for 
it? Right now it is the United States that is paying for most 
of the R&D, and especially it is the Medicare senior that is 
paying for most of the R&D in the world by the pharmaceutical 
companies, and the question is is it appropriate for the 
Medicare senior to be paying--who has gaps in coverage--to be 
the one that is paying for most of the R&D in the world?
    Mr. Bilbray. Wouldn't you agree that the consumer, be it 
the government paying it or the consumer of the drug, always 
pays R&D for any product in the free enterprise system?
    Dr. Anderson. Sure. But essentially what we have to have is 
make sure with these varying different prices that Part D plans 
are planning that the Part D plan's paying, that the VA is 
paying, that we have to think about whether we want the 
Medicare senior to be the one who's paying for the 
pharmaceutical R&D in the world.
    I'll say it again. The consumer is going to pay for it no 
matter what.
    Mr. Bilbray. Your point is there are American benefits 
going around the world. I hope we remember that when Congress 
starts talking about giving free drug benefits to the rest of 
the world and doesn't put our seniors first in line for those 
benefits because the political pressure isn't being put for 
those consumers that the rest of the world is getting.
    I yield my time.
    Chairman Waxman. The gentleman's time has expired.
    Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chair.
    I want to go back into this--the whole drug pricing, and I 
am wondering if you could tell me how the lack of transparency 
is complicating the oversight of these programs in a little 
more detail. Both of you doctors touched in your testimony on 
the transparency. I think people think there is transparency, 
because if I log on to the sites to do a comparison with any of 
my seniors, I see the cost of the drug shows up under the 
plans. So people would think there is transparency, but that is 
not the transparency you gentlemen are talking about to reduce 
fraud.
    Mr. Schondelmeyer. That is not the only one, but you need 
transparency at other levels and about other decisions. Logging 
on to the Web site can just tell me if I'm buying a specific 
drug to treat my heartburn, does that exact drug have different 
prices across different plans. And I can only make that choice 
once a year, and the plans change their formulary several times 
a year, so that may shift.
    But what is really more important is if you all remember 
the Medicare Part B program pays for certain medications 
administered in a doctor's office, and under that program, the 
way the payment was set up, which isn't greatly different than 
what we have in the Medicare Part D program now, in some ways 
the drug companies were able to list much higher prices and 
then sell them at a huge rebated discount to the physicians. 
And the physicians were making huge margins, and they made more 
money by prescribing higher-priced drugs. And, yes, the market 
worked because physicians did prescribe more higher-priced 
drugs where they got more money.
    But we changed that to the average sales price system 
instead of the mark-up off of AWP that we used to have under 
Medicare Part B. In many ways, the Medicare Part D program 
allows rebates to be paid on a hidden basis from a drug company 
to the prescription drug plan, and it will affect the drugs 
they call their preferred drug, and so you may get prescribed a 
higher-priced drug than one that works just as well, just as 
safe, just as effectively, but isn't the preferred drug and 
costs less.
    But that is not a choice you can make as a consumer when 
you log onto that Web site, and consumers don't have the 
knowledge often to know I could get this drug, and instead of 
this drug, it is a different drug, but it would work just as 
well. We usually don't know that.
    So I would argue this market, because of its very structure 
and the complexity, doesn't work, of course, effectively at the 
consumer level. The physician doesn't know the prices. The 
prescription drug plan has an incentive to maximize their 
rebates and revenue and profits, not necessarily lower the cost 
of the program. And they can finagle a way to make the premiums 
lower without making the total costs lower. And we don't have a 
way to detect it when we don't have the rebate information to 
look at its effect on formularies and other decisions being 
made.
    Dr. Anderson. You give the pharmaceutical industry a 17-
year patent, but it gives them a virtual monopoly to set 
prices, and if I am the Part D plan and I am negotiating 
against a monopoly, I can't do very well.
    Mr. Schondelmeyer. There are also protected carriers where 
the prescription drug plan has to take all of the drugs in that 
category to put them on their formulary, which means they have 
very little leverage to protect their prices anyway. So we said 
we are going to call prescription drug programs a private 
market, and then we took away the tools that they could use in 
the private market, and we're still calling it a market.
    Ms. McCollum. Mr. Tierney touched on the confusion that 
many of the people we represent have in providing for plans. I 
am still hearing from folks in Minnesota. I was out in 
someone's home the other day, and she had all of these plans 
laid across her table, 87 years old, trying to figure out what 
to do.
    I also hear from pharmacists that people are bringing their 
plans in to try to figure out does this plan have the right 
drugs for the right kind of interaction for, you know, what 
might be happening in the future; and physicians, too. Has this 
made this more cumbersome and burdensome on physicians and 
health care providers as well as pharmacists?
    Dr. Anderson. I believe it has--I have a paper I can't talk 
about, it is coming out in the Journal of American Medical 
Association at the end of the month, that talks about the 
doughnut hole and the problems that physicians are having when 
they are in the doughnut hole, and dealing with low-income 
Medicare beneficiaries who are saying, I don't have the money 
to get through the doughnut hole, what do I do? Do I go to the 
VA? Do I go to other places? Do I go to Canada? And that forces 
us to remain in the doughnut hole. So this article basically 
tries to provide some physicians some guidance on what to do 
when you have Medicare beneficiaries in the doughnut hole, and 
is low income and doesn't know what to do, and it's something 
that the doctor has never dealt with before.
    Mr. Schondelmeyer. In reality, what happens is if I am a 
consumer, I choose the low-premium, no-deductible plan, lowest 
cost to me. Then I'm more likely to reach the doughnut hole 
earlier. But when I choose that low-premium, no-deductible 
plan, I don't think about the cost of the individual drugs in 
January when my first prescriptions are being written by the 
doctor. The doctor provides whatever they want, whatever is on 
the formulary. If it is a higher price, fine. Then in September 
or October, I hit the doughnut hole, and I find out the drug 
costs $160, and the doc says, well, we can change you, come 
back in for a new office visit. More costs to me. I can change 
your prescription--and no cost to Medicare, by the way. I can 
change a prescription to a different drug, and we will have to 
retitrate your dose, do some new lab tests, and we can put you 
on a lower priced drug that works just as well now that I know 
you are in the doughnut hole, and it's a fact.
    So the way we designed this program results in added costs 
of physician visits, lab tests and added stress and strain on 
the patient having to adjust their therapy during the year to 
try to get a lower price in the market.
    Chairman Waxman. The gentlelady's time has expired.
    Mr. Sali.
    Mr. Sali. Mr. Schondelmeyer, I understood you to testify 
earlier that the amounts that the various government programs 
actually pay for drugs, individual prescription drugs, that you 
weren't able to get that information, and that was part of the 
reason why you say there is not transparency in the pricing; am 
I correct about that?
    Mr. Schondelmeyer. That is a fairly big statement. I am 
able to get certain government information, but not--I don't 
know how much an individual patient paid for an individual 
prescription at the pharmacy versus what is posted on the Web 
site. Yes, the Web site has a price on there, but I have no way 
of verifying as a researcher is that the transaction price 
that, you know, senior citizens would pay if they went into 
that pharmacy and bought the prescription. I don't know how to 
verify that as a researcher without--short of data from the 
government; because of HIPAA and other things, I can't get 
access to that.
    Mr. Sali. You can't get information under HIPAA as a 
researcher or under the Freedom of Information Act on specific 
amounts that have been paid by the government?
    Mr. Schondelmeyer. I can work through HIPAA and Freedom of 
Information, but I'm not aware that CMF or anybody is making 
that price information available to researchers at this point 
in time. And if you are, I would like to know.
    Mr. Sali. Have you made a request under Freedom of 
Information or HIPAA for any of that information?
    Mr. Schondelmeyer. I have not for that specific 
information.
    Mr. Sali. Mr. Anderson, would you agree with me that the 
single most important success in reducing drug prices in the 
last decade was Wal-Mart's offering 333 prescriptions for $4 a 
month?
    Dr. Anderson. As a researcher, I don't know if that is true 
or not. The Wal-Mart program has been in existence for a 
relatively short time. It is hard to figure out whether or not 
other companies will follow that. I know that some have, and I 
don't know what impact it will have on utilization. So I think 
it's a great step forward, but I couldn't answer your question.
    Mr. Sali. Is it your testimony before this committee that 
you're not aware of the details of Wal-Mart's offer of 330 
prescriptions for $4 a month? In spite of that offer and your 
lack of knowledge about it, you are suggesting today that 
greater government involvement in drug pricing is the cure for 
fraud and abuse in drug pricing; is that correct?
    Dr. Anderson. I think that you have to look at the 330 
drugs that are selling which are pretty much all generic drugs. 
There are no brand-name drugs on that list, and really the 
mark-up and the difference that we see is in the brand-name 
drugs, not in the generic drugs.
    Mr. Sali. So you apparently do have some knowledge of Wal-
Mart's offer?
    Dr. Anderson. Not a research knowledge, but a general lay 
person's knowledge on this.
    Mr. Sali. So you have researched everything else but Wal-
Mart's offer itself?
    Dr. Anderson. I have not written a paper. I have not 
studied in detail. It hasn't been around long enough to do a 
research analysis on it yet.
    Mr. Sali. Mr. Moorman, you were critical a little earlier 
about the Department of Justice and claiming they have a 
mechanism to prevent, execute fraud and abuse, but they won't 
do it and you specifically said that money has been withheld 
within the--I don't have the information right in front of me--
the health care fraud and abuse account, something like that. 
Let's see. It was the health care fraud and abuse control 
account for health care. You claim that money had been withheld 
from that, and so there weren't attorneys working on these 
areas.
    Are you suggesting that the Department of Justice is really 
the one, the organization, that we should be investigating for 
fraud and abuse in this area?
    Mr. Moorman. I don't think it's fraud and abuse, but I 
think that this committee has government oversight. Look, each 
year in recent years the Attorney General and the Secretary of 
HHS allocate a certain amount of money to the U.S. attorneys 
and to the Civil Division for health care fraud cases. Thirty 
million has been the annual figure which has been allocated 
generally to the U.S. attorneys.
    Mr. Sali. Your claim is that money is being withheld. We 
aren't prosecuting those cases?
    Mr. Moorman. Attorney General Peter Keisler, in a letter to 
the House Judiciary Committee on August 11th of last year, said 
that the U.S. Attorneys were only getting $10 million of the 
$30 million allocated to them.
    Mr. Sali. We have put this program in place in the 
Department of Justice to go in and investigate this and 
prosecute it, and now that is not happening. Is your suggestion 
that we need more government to go control the government and 
investigate them for fraud and abuse?
    Mr. Moorman. No. What I am suggesting is this committee 
find out why the lawyers who are handling these cases aren't 
getting the resources that have been allocated to them.
    Mr. Sali. And would it be your conclusion, then, if that 
was done, the drug fraud and abuse, that it would be curtailed 
by those activities then?
    Mr. Moorman. I wouldn't call it fraud and abuse. I would 
call it some form of government mismanagement. I would like to 
know what happens to the $114 million that goes to the FBI.
    Mr. Sali. My question is we have this account set up, 
health care fraud and abuse control account.
    Mr. Moorman. Yes.
    Mr. Sali. And if that money were utilized properly, and 
those attorneys were actually prosecuting those cases, do you 
believe that would help curtail the fraud and abuse in drug 
pricing?
    Mr. Moorman. There are 180 cases against the pharmaceutical 
companies----
    Mr. Sali. Yes, or no?
    Mr. Moorman. If they had more lawyers, they could handle 
those cases better.
    Mr. Sali. Do you think it would help or not?
    Chairman Waxman. The gentleman's time has expired. Yes, it 
would help, or, no, it wouldn't?
    Mr. Moorman. Yes, it would help.
    Chairman Waxman. Mr. Cooper.
    Mr. Cooper. Mr. Moorman, citing Peter Keisler's letter that 
there are a backlog of about 180 cases, and that is probably 
just in the Medicaid False Claims Act area, are there other 
cases that we need to know about in the backlog?
    Mr. Moorman. Yes. There have been cases that have been 
filed by States' attorney generals sometimes under State false 
claims act, sometimes under other authorities, and States that 
don't have them. And there are sort of related class actions 
that have been filed on behalf of people who pay copays with 
regard to these frauds.
    All told, we don't really know the actual number of cases 
that are out there against the pharmaceutical company involving 
this fraud against Medicaid or Medicare-related, but it is a 
substantial number, and it involves a lot of money. It is at 
least 180, and we know cases have been filed that he has said 
that it is at a faster rate than they are being resolved.
    Mr. Cooper. They're being resolved at least at about 3 a 
year.
    Mr. Moorman. Yes.
    Mr. Cooper. So at that rate it would take 60 years to 
resolve these cases?
    Mr. Moorman. Theoretically, but we know they will never 
last that long.
    Mr. Cooper. But with the new cases being filed, do we have 
any idea of the number of new cases being filed?
    Mr. Moorman. That's hard to pin down because under the 
False Claims Act the cases are always filed sealed, so the only 
person who would know that would be the Justice Department.
    Mr. Cooper. And we need to ask them that question, but 
assuming that there are about three new cases filed every year, 
we would never reduce the backlog at this rate even over 1,000 
years?
    Mr. Moorman. Never. And that is the situation where 
actually--because more than three are filed. I know from the 
grapevine that more than that are filed, because whistleblowers 
call me, and I--who have these kind of cases, and I refer them 
to lawyers, and I get more than three a year, I can assure you.
    Mr. Cooper. To the average person back home, this looks 
awfully suspicious to have one of the most powerful lobbies in 
Washington or in any State capital see such a slow legal 
process and perhaps deliberate underfunding of the very DOJ 
attorneys who are supposed to be resolving these cases----
    Mr. Moorman. Yes. I think people would be suspicious of 
that. I am not making any charges, but I also think that if we 
acted forcefully with regard to all of these cases, we could 
actually perhaps get the pharmaceutical industry to have an 
attitude change toward Medicare and Medicaid.
    Mr. Cooper. As expenditure for government money for every 
dollar on these DOJ attorneys and U.S. attorneys, can you 
estimate the return to the U.S. taxpayer in terms of 
successfully resolved cases?
    Mr. Moorman. Economist Jack Meyer has done a series of 
studies on this, and his most recent one last year indicates 
the Justice Department gets back $15 for every dollar that they 
spend on these cases--that are spent on these cases. Those 
estimates, by the way, were made with the assumption that the 
Justice Department was getting the full amount of HICPAC money 
that they were entitled to. Since they are getting less, it 
could well be that they are getting $25 back for every dollar. 
Some numbers we haven't quite figured out yet, but let me put 
it this way: We're not losing money in pursuing these cases. 
It's very cost-effective.
    Mr. Cooper. I am not aware of any other government where 
for $1 of taxpayer funding we receive a minimum of $15 back and 
possibly, as you say, $25 for every dollar we spend. Are you 
aware of any other government spending that is this productive 
for the taxpayer?
    Mr. Moorman. I am not.
    Mr. Cooper. As Dr. Anderson mentioned earlier, the 10-year 
predicted liability for this Medicare Part D drug program is 
estimated to be $1 trillion. The longer-term liability, 
according to the Treasury Department, is supposed to be $7.8 
trillion. Some people celebrate that because it is actually 
slightly cheaper than what it was predicted; it is supposed to 
be $8 trillion as opposed to $7.8 trillion.
    I think we need to remind ourselves, looking at the big 
picture, that most all of this is completely unfunded. There 
never has been an entitlement program passed in American 
history that is this unfunded. So that strikes me as truly 
remarkable because here we are stimulating demand for 
pharmaceuticals, which you know in many cases we need to do, 
but we are completely shirking the obligation for paying for 
those pharmaceuticals because these are numbers that will be 
added to the national debt, and since China and other 
countries--or other countries are increasing, our large 
creditors, those countries are being asked to fund our drug 
habit, which is a pretty curious situation to put our seniors 
in, the folks who need these medicines the most.
    So I'd like to remind my colleagues that we would be lucky 
if this program only cost $1 trillion. It is at least $7.8 
trillion, and the amount--you say if the estimate, cost 
estimate, has already doubled just within the last 2 or 3 
years, the $7.8 trillion could double, and we are really in a 
situation where we have to look at price to get taxpayers and 
patients value for their dollar.
    I see that my time has expired, Mr. Chairman.
    Chairman Waxman. Thank you.
    Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman.
    I am glad my colleague mentioned the Wal-Mart situation 
because when I look at that plan and see that it is possible to 
buy a prescription for $4 a month, I come to a couple of 
different conclusions, one of which is that if they can sell it 
for $4 a month, why shouldn't everybody be able to buy that; 
and that there is obviously a lot of room to lower prices. 
Would that be your conclusion from the Wal-Mart plan as well?
    Dr. Anderson. I think definitely. I think where you are 
going to see the most reductions, though, where there is 
competition, where that is in the generic market. I think when 
you don't have competition in the brand-name markets when it is 
a sole drug, you won't get Wal-Mart setting those things for 
$4, and that is where the government, I think, needs to 
intervene.
    Mr. Schondelmeyer. I wouldn't necessarily conclude the same 
thing. First of all, $4 for prescriptions, even if the drug 
didn't cost Wal-Mart anything, is more than the pharmacist's 
time to dispense the medication, I am sure of that. So Wal-Mart 
then is selling at a loss leader price or predatory pricing 
level on the $4 plan.
    And the Web sites I have checked on Medicare and the 
prescription drug programs, I haven't seen anyone telling me 
that I can get that $4 prescription at Wal-Mart under Medicare. 
Is Medicare getting the advantage of that $4 price? Not that I 
am aware of. I would encourage the committee to ask Wal-Mart if 
the Medicare program is getting the price that you are talking 
about.
    Mr. Yarmuth. That segues into another question I have. Some 
people have mentioned the fact that premiums, some premiums, 
with the Medicare Part D program have been lowered since its 
inception, and I have read in some various media that one of 
the reasons that this happens is not necessarily because they 
have been able to negotiate lower drug prices, but they have 
used that plan as a way to market their company to sell a 
higher-priced Medicare Advantage Plus type of program. To your 
knowledge, is that also the case?
    Mr. Schondelmeyer. I haven't thoroughly analyzed it, but 
now that we know that seniors have made their second choice, 
once we have some data, we can begin to look at who shifted and 
what reasons did they make their shifts. Working at the 
University of Minnesota, we are currently fielding a study to 
analyze issues like that. In about 2 or 3 months we will have 
an answer for you.
    Mr. Yarmuth. We talked about research, and the 
pharmaceutical companies do a lot of research. We know they do. 
But my experience, at least in talking to people at the 
University of Louisville and other places, is that most of the 
initial research done on pharmaceutical, new pharmaceuticals, 
are done by scientists at places like the University of 
Louisville where they just developed the cervical cancer 
vaccine. That research is primarily funded by taxpayer dollars, 
whether through NIH grants or through the State--just the State 
subsidy to the higher institutions. And then the pharmaceutical 
companies, all of that research having been done, come in and 
take that experimental drug at that point through the process.
    So a great deal of the formative research and development 
is done by--funded by taxpayer dollars exclusively not because 
they pay for the product, the end result, but because taxpayers 
are refunding the same result.
    Dr. Anderson. You just doubled the NIH budget recently 
because you believed that it would come up with new research, 
some of it in drugs and some of it in other areas. I applaud 
you for doing that especially at John Hopkins. I applaud you 
for doing that, but at the same time we need to work on 
technology transfer so that when NIH works on these drugs, they 
become available, especially a lot of the orphan drugs, a lot 
of the drugs that NIH does specialize in. There is a market for 
that.
    Mr. Schondelmeyer. You testified about an important point 
there with respect to research and development. At first we 
have to separate research from development, and by research I 
mean the work done to discover an innovative new therapy as 
opposed to the work done to come out with a therapy you can 
market after you lose your first patent, and you change the 
shape of the molecule a little bit or you change the dosage 
form.
    Second, I would ask does our current market--regulatory and 
market structure work to reward innovation? I would give, as an 
example, the company in America, the brand-name company that 
markets the most cancer drugs has more than 20 cancer drugs. 
How many of those cancer drugs were discovered by that company? 
Zero. Now, they're still very profitable and very successful. 
Is that an example of how the market is rewarding innovation? I 
don't think so. It's rewarding marketing, it's rewarding 
development, but not innovation. In fact, it rewards people who 
are not very innovative.
    Mr. Yarmuth. Thank you very much.
    Chairman Waxman. Thank you.
    Mr. Sarbanes.
    Mr. Sarbanes. You know, if you are the brand pharmaceutical 
industry, and I really--I distinguish between the two because I 
think there is much more criticism that can be made of the 
brand industry and, frankly, criticism of the way we deal with 
the brand industry. But if you are that industry, you're a pig 
in mud.
    I think when you listen to this testimony, you know, the 
industry--it is as though they have a giant console in front of 
them with 5,000 little buttons, and they can just pick which 
buttons to press to make sure that the edification of the 
public and I think of Congress and Washington is maintained 
depending on what the response happens to be at any given 
moment in time.
    In terms of dealing with the Medicare beneficiary 
population, I think they have a Plan A and a Plan B. Plan A is 
the one that is in play right now, and that is OK, great. 
Government is coming along with a Part D program, and there is 
going to be government funding now available for all of these 
beneficiaries to go into the market and purchase prescription 
drugs. So what we ought to do is first let us make sure that 
nobody can come negotiate with us directly on behalf of that 
huge population. That is the first thing we should do.
    The second thing you should do is we should endorse the 
idea of it being an indirect program, not have it directly 
administered by Medicare, because if it can be indirect, if we 
can get all of these plans into the mix as kind of sort of 
intermediaries, that will help kind of cloud what is going on 
with the pricing and create the illusion of competition as 
driving prices down. But in the meantime, we can do all of 
these other things that you have mentioned to make sure that we 
can keep the prices up.
    Third thing, let us throw the doughnut hole into the whole 
mix, because right at the point where people who are sick are 
needing to get that coverage, sort of, you know, they have to 
step in and pick up the benefit, and that helps the plans, and 
in turn that will help us because we are standing behind that 
scheme. So that is Plan A.
    What we are talking about now in the last 2 weeks of having 
authorized the Secretary of HHS to go in and negotiate 
directly, and I think over time hopefully looking at more 
direct administration of Part D, the way we have done with Part 
A and Part D, is maybe we are going to force them into Plan B. 
But Plan B is pretty good, too, because Plan B is when the 
government comes directly to bargain with us, let's make sure 
nobody really understands the prices, AWP and AMP, and this 
rebate and that and so forth.
    Let us say we get to Plan B. How do we nail down what the 
pricing is that will allow the government to get the best 
price, to be able to negotiate effectively on behalf of 
Medicare beneficiaries? And I regard the relationship between 
the government and the Medicare population as a fiduciary one. 
When I hear beneficiary, I hear of a fiduciary relationship. So 
we ought to be doing everything we can to make sure we get the 
best price; how do we catch this smoke, and that is what it is, 
to make sure that the consumers and the beneficiaries and the 
government and the taxpayers are getting the best price?
    Mr. Schondelmeyer. I first would like to address that and 
thank the Member for asking the question, and it is 
particularly relevant to you. I think I'll tell you why in a 
moment.
    I think first we ask drug companies to report their prices 
as we have, the average manufacturer price to the government, 
but I think that reporting should carry with it a required 
certification by the CEO of the company much like the Sarbanes-
Oxley provision.
    Mr. Sarbanes. I've heard of that.
    Mr. Schondelmeyer. I think it is a required certification, 
and the reason I say that is I have had the privilege and/or 
task of serving as an expert witness in cases involving pricing 
and drug pricing issues in the marketplace, and while I can't 
discuss specific cases, specific issues, I have seen more times 
than I would like to in those cases internal memos inside drug 
companies showing they fully understand the government policies 
and regulations. They carefully analyze the options, and they 
say, this is a choice that would give us the most revenue and 
profit. It may not be the best approach in terms of the public, 
or even may not be legal in some cases, but it is the best 
business decision even if we have to get caught and pay the 
costs. So that tells me, first of all, there is not enough 
accountability. And second, the penalties aren't high enough 
when they do get caught.
    Mr. Sarbanes. Thank you.
    Dr. Anderson. Other countries purchase drugs just like the 
United States do, and I think one of the things we have to take 
a look at is how does the U.K. do it, how does Canada do it, a 
variety of other countries there. They're able to get around a 
lot of the smoke and mirrors.
    Chairman Waxman. Thank you.
    Mr. Welch.
    Mr. Welch. Thank you, Mr. Chairman.
    I would ask Mr. Schondelmeyer and Dr. Anderson if you could 
make two recommendations on what we could do to reward 
innovation versus marketing and development, what would that 
be?
    Mr. Schondelmeyer. One is you have a pediatric provision 
that says if you do pediatric studies in the marketplace, you 
get an extension of your exclusivity or patent time. I would 
move that up so you have to do those studies within the first 2 
years of the drug being on the market to get them. Don't tack 
it on at the end of 15 years and say, we will find out if it is 
good for a cause after we have used it for 15 years. Require it 
up front. That will require innovation and better studies up 
front.
    Second, we should develop a government Medicare program and 
Medicaid program and a private market that rewards paying for 
true innovative products, and don't keep paying for these 
marginal manipulations in dosage form or strength or a 
different-shaped molecule, but will pay the cost of the new 
true innovative therapies even though it is higher. But take 
the funds out of--or create real competition across those 
products that are just simply patent extenders with the 4th or 
5th or 12th patent money given the drug product.
    Dr. Anderson. I would like to emphasize that essentially 
what I would call it is looking at the value. And essentially 
what you would have is NIC, which is the U.K. system, to 
evaluate--is they are looking for drugs that actually have 
additional value over the replace--the drugs that they are 
replacing, and they should do that. And so Congress should 
spend and either give it to ARC or give it to NIH or somebody, 
a sizable amount of money to look for value in new drugs, to 
really take a look and make sure that these drugs that are 
being developed are valuable, and for those drugs you do need 
to pay a premium. Companies do invest a lot of money in these 
new drugs. You know, Pfizer just spent $900 billion to develop 
a drug, and then it didn't work for a cholesterol drug. They 
have to be rewarded for those kinds of things, but it is only 
for truly innovative drugs.
    Mr. Welch. Next question. What two steps would each of you 
gentlemen recommend that Congress take to get the best price 
for our taxpayers and consumers without compromising innovation 
or eroding the quality of the care that prescription drugs can 
provide to our citizens?
    Dr. Anderson. For me, it would be two things. One is price 
transparency to really know how much the different drug 
companies are charging, the different Part D plans, and I 
really care about the lowest price that any of the Part D plans 
can do.
    The second thing I am concerned about is utilization, and 
essentially what we know is that two-thirds of the drugs and 
two-thirds of Medicare spending is by Medicare beneficiaries 
with five or more chronic conditions. And we have to develop 
ways to monitor utilization to get appropriate care 
coordination done for those Medicare beneficiaries of five or 
more chronic conditions. And if we take it from the 
marketplace, most of those companies have developed stuff 
around the healthy population, not the sickest population, you 
know, basically the workers at various companies. We don't have 
good models around people with multiple chronic conditions.
    Mr. Schondelmeyer. Related to that, I think one is 
performance-based utilization of pharmaceuticals, and make the 
medication therapy management provision real and functional in 
the law. Currently each prescription drug program has to have a 
plan in place, but from what I can tell, those aren't very 
effective, and we aren't seeing much impact or effect from 
those in the marketplace. And utilization deserves a lot more 
attention than it is getting right now.
    Second, I think you could fund evidence-based research both 
in terms of policy and in terms of drug product. The government 
does fund a lot of science research that does help find new 
drugs, but we fund very few studies that compare blockbuster A 
and blockbuster B.
    Nor do the drug companies fund those because they often 
don't want to know the answer, or they know the answer and 
don't want to do the study. So the only people that really have 
a motivation to do that would be the public or major payers for 
health care.
    So we need a process and a system that funds Blockbuster A 
versus Blockbuster B with well-defined studies and with 
scientists that aren't captured by the drug company coattails 
and research funding coattails that can make independent 
decisions about what is the best use of our resources.
    Mr. Welch. Thank you. I yield the balance of my time.
    Chairman Waxman. Thank you very much, Mr. Welch.
    Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    And, gentlemen, first of all, thank you for your testimony. 
And, Mr. Moorman, your testimony--all of your testimony--is 
quite depressing because we are the ones that go into the 
senior citizens' houses and see people who are choosing between 
trying to pay for prescription drugs and provide heating and 
food, and they have to make these choices; and it is so sad. 
And as I listen to you, Mr. Moorman, I could not help but think 
that in answer to some other questions you talked about how we 
have a situation where people are basically--pharmaceutical 
companies are sort of waiting it out because they know that the 
Justice Department will not get to the cases.
    And, you know, it strikes me that as soon as I finish this 
series of questions, I am going to go out and meet with 12 
constituents who walked from Baltimore over here. They are 
former felons. All of them have been to prison. And they are 
coming here trying to get a better Baltimore with regard to 
crime rates.
    I think about what you all have said here today, and I am 
confused. Is there fraud? And if there is fraud, then just like 
those guys that are standing out there right now in the cold, 
somebody ought to be going to jail, because what we are doing 
here is we are literally taking money away from two sets of 
people.
    As a trial lawyer, I can tell you, I have seen it. I have 
seen folks steal $1,000 and go to jail. On the one hand, you 
have taxpayers who are being defrauded and you have elderly 
people in my district and every single district, all 35 
districts of this country, who are catching hell because they 
can't afford the prescription drugs.
    You know, Dr. Schondelmeyer, you said something that is 
very interesting when you were talking to my colleague from 
Baltimore, Mr. Sarbanes.
    You talk about Sarbanes-Oxley. I am wondering--this is a 
question, and all of you can answer this--is this a question of 
whether we need more teeth in the law you have or, Mr. Moorman, 
is it a question of will? In other words, is it--do we have the 
will to say to folks if you are going to take money away from 
the citizens of the United States that we are going to 
prosecute you?
    Now I know you talked about the civil cases. But did we 
have the criminal penalties? Because I am convinced that when 
you start seeing some of these folks, they do a good job, the 
folks that do the television piece they show them going to jail 
handcuffed and everything. And I am just wondering, do you see, 
Mr. Moorman--when you hear from whistle-blowers, is a lot of 
this stuff a scheme that you get a impression goes way up the 
ladder?
    Or is it--and it sounds like, Dr. Schondelmeyer, what you 
just said, if I was a--we have the U.S. Attorney sitting right 
behind you, by the way--we are talking about some criminal 
stuff that somebody ought to be not civilly prosecuted, but 
should be going to prison.
    So I am just wonder where--and others will sit here and 
say, well, you know we ought to smack them on the wrist. Well, 
guess what, those guys I am about the meet, nobody smacked them 
on the wrist; they sent them to prison. So help me with that.
    Mr. Moorman. Can I address this? I think that in order to 
bring these, a lot of them, business plan frauds of companies, 
I think the way to bring it to a stop is to make them give the 
money back and take all the profit out of this, this whole 
thing. This false claims act, for example, provides for triple 
damages. Yes, maybe a few people should go to jail. But they 
are going to take the risk as long as there is profit in it. 
The civil remedy is actually--if it will be pursued more 
vigorously--will be more effective than the criminal remedy, in 
my opinion, but the criminal remedy should not be forgotten.
    Mr. Schondelmeyer. You pose the question as if there were 
two issues, one teeth; the second, the will to do something 
about it. I think there is a deficiency in both areas.
    I think we don't have enough teeth. But even the teeth that 
exist, the cases aren't being prosecuted, we don't have the 
will to prosecute them very effectively. So I think we are 
deficient in both the will to pursue them and the teeth to make 
a significant enough penalty that it becomes a deterrent.
    Dr. Anderson. And I would add a third thing and that is the 
word ``confusion.'' I think there are so many different 
formulas out there, and it is very difficult for any person to 
understand how these formulas are set; so with a lot of 
confusion, that is the possibility both of fraud but also, just 
lots of extra money flowing out because of the confusion.
    Mr. Cummings. Thank you very much.
    Mr. Cooper. I was wondering where a lot of these fantasy 
drug prices came from. And looking at the inspector general's 
testimony, one of them, Mr. Robert Vito of the Philadelphia 
district, says, average wholesale prices--which are not defined 
by law or regulation--are compiled in drug compendia such as 
Medical Economics' Red Book and First DataBank's Blue Book. As 
the findings of our reports have consistently demonstrated, the 
published AWPs that States use to determine their Medicaid drug 
reimbursement amounts generally bear as little resemblance to 
the prices incurred by retail pharmacies.
    What is you gentlemen's opinion of the Red, Black and the 
Blue Book? Do they add value to the marketplace?
    Mr. Schondelmeyer. I think they add value, but I think we 
need to look at how their practices occur. And in reality the 
drug companies are the ones who--either drug companies and/or 
wholesalers report information to these firms. So they largely 
are a collector and a processor and distributor of information. 
But there are practices they engage in that can also create 
problems in the market. And there is a case currently against 
First DataBank and some issues of changing the price in the 
market.
    There is a case where the AWP was increased over the WAC 
substantially in about 2001-2002 across the board on all 
products in the market, which meant that the marketplace and 
everybody who paid for prescription drugs based on WAC or AWP, 
which is virtually every government and private program in the 
country, they paid 8 percent more that year rather than 6 
percent more for those drugs just because of that one 
administrative change in that company.
    So I think there is a need for some oversight of those 
firms. But it is not them alone; it is the prices reported to 
them also, by the manufacturers that drive it.
    Mr. Cooper. You say because one private company made a 
mistake or a change that we pay 2 percent more for drug prices.
    Mr. Schondelmeyer. For those drug products that had their 
drug prices increase, yes, every private payer and every 
Medicaid and every public payer, yes, that base is a peer WAC 
and nearly all do, except for a system like the VA. That is 
entirely closed.
    Dr. Anderson. I agree with what he said.
    Mr. Moorman. I would say that there is a considerable 
amount of evidence that has been developed in cases where 
average wholesale price has been seriously abused by 
pharmaceutical companies because the prices tend not to be 
based on the average or any actual wholesale price whatever, 
but are there to give, but are increased incentives, for 
example, for the pharmacies to use their drugs. In other words, 
they are inflated for the purpose of increasing incentives to 
pharmacies to provide their drugs, and cost is borne by the 
taxpayer improperly.
    Chairman Waxman. Let me just ask you one bottom-line 
question. When we have decided we are going to pay for drugs 
for seniors under Medicare, can you think of any other system 
that could be even more expensive than the one that was 
designed by the Republicans? And second of all, can you think 
of a system that is even more expensive than the one designed 
by the Republicans?
    Dr. Anderson. Well, as I look around the world to see, I 
don't see a more expensive system.
    Mr. Schondelmeyer. I can't think of a system that would be 
much more complex, which means then that consumers have 
difficulty making wise decisions, which means it really isn't 
an efficient market. So, no, I can't think--we could tweak it 
and make it a little worse. But I can't think of many ways to 
make it a lot worse.
    Mr. Moorman. I would say the complexity in the system 
magnifies the opportunity for frauds and drives the cost up. It 
has to be simplified.
    Chairman Waxman. Sounds like a dream for the pharmaceutical 
industry. That is a rhetorical comment.
    Thank you, very much for your testimony. We appreciate you 
being with us.
    We will now move to our second panel. We have four 
government witnesses on this panel. John Dicken will be 
testifying on behalf of the Government Accountability Office. 
Lew Morris will be testifying on behalf of the Office of the 
Inspector General of the U.S. Department of Health and Human 
Services. Ron Tenpas will be testifying on behalf of the 
Department of Justice. And Patrick J. O'Connell is the chief of 
the Civil Medicaid Fraud Unit of the Texas Attorney General's 
Office.
    We welcome each of you to our hearing today. Insofar as you 
have a prepared statement, that prepared statement will be 
entered into the record in its entirety.
    It is the practice of this committee that all witnesses 
testify under oath. So if you would please rise and raise your 
right hands, I will administer the oath.
    [Witnesses sworn.]
    Chairman Waxman. The record will indicate that each of the 
witnesses answered in the affirmative.
    Mr. Dicken, why don't we start with you. I will keep the 
timer on for 5 minutes. We ask you to try to keep your oral 
presentations to around 5 minutes.

STATEMENTS OF JOHN E. DICKEN, DIRECTOR, HEALTH CARE, GOVERNMENT 
   ACCOUNTABILITY OFFICE; LEWIS MORRIS, CHIEF COUNSEL TO THE 
    INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN 
SERVICES; RONALD J. TENPAS, ASSOCIATE DEPUTY ATTORNEY GENERAL, 
 U.S. DEPARTMENT OF JUSTICE; AND PATRICK J. O'CONNELL, CHIEF, 
CIVIL MEDICAID FRAUD SECTION, OFFICE OF THE ATTORNEY GENERAL OF 
                             TEXAS

                    STATEMENT OF JOHN DICKEN

    Mr. Dicken. Thank you. Mr. Chairman, members of the 
committee, I am pleased to be here today as you examine 
oversight issues related to drug pricing in Federal programs.
    With projected annual Federal spending for prescription 
drugs from retail sources approaching $100 billion by next 
year, it is increasingly important to have effective oversight 
to ensure the accuracy of the price information that drug 
manufacturers and private plans report to Federal agencies. 
However, as you have heard, recent litigation involving 
allegations that drug manufacturers and pharmacy benefit 
managers reported inaccurate price information has resulted in 
several of these private organizations agreeing to paying 
hundreds of millions of dollars to States or Federal programs. 
These settlements illustrate some of the oversight challenges 
in this area.
    My comments today highlight findings from reports GAO 
released in 2005 examining rebates that manufacturers pay State 
Medicaid programs and in 2006 examining maximum prices 
established for certain federally supported entities known as 
340B prices.
    I will also discuss the new Medicare Part D program, which 
shares certain features with these and other Federal programs 
that could pose oversight challenges.
    Finally, I will discuss several potential areas for future 
congressional oversight of these programs.
    Regarding the Medicaid drug rebate program, we have 
reported inadequacies in CMS's oversight in price information 
reported by manufacturers to determine the rebates owed to 
States. We reported in 2005 that CMS conducted only limited 
checks for errors in prices manufacturers reported, and that 
did not generally review the methods and underlying assumptions 
that manufacturers use to calculate pricing information.
    We also noted that CMS did not always provide clear 
guidance for manufacturers to follow when determining prices 
including, for example, how to treat sales to PBMs or properly 
disclose certain price concessions. CMS recently issued a 
proposed rule that is intended to provide for clarity.
    We have also reported inadequacies in HRSA's oversight of 
the 340B drug pricing program. Because 340B prices are based on 
data provided by drug manufacturers for the Medicaid drug 
rebate program, inaccuracies in those amounts also affect the 
340B program.
    Further, we reported in 2006 that HRSA did not routinely 
compare the prices actually paid by certain eligible entities 
with the 340B prices that are intended to be a maximum price. 
In fact, we found that many of these entities paid prices for 
drugs that were higher than the 340B prices.
    These oversight inadequacies are confounded by a lack of 
transparency in 340 B prices. Because 340B prices are not 
disclosed to the eligible entities purchasing drugs, the 
entities are unable to determine whether the prices they pay 
are at or below the 340B prices.
    HRSA has made changes to its oversight of the 340B pricing 
program intended to address some of these concerns.
    The Medicare Part D program shares with the other Federal 
programs certain features that could pose similar oversight 
challenges. For example, like the Medicaid drug rebate and 340B 
drug pricing programs, the Medicare Part D program relies on 
private organizations that sponsor drug plans to calculate and 
report price information to CMS and relies on CMS to ensure the 
accuracy of that information. Other features of the Medicaid 
Part D program, such as its reliance on contracts with multiple 
insurers to provide drug coverage to beneficiaries through a 
complex set of relationships and transactions, also suggest 
areas of potential oversight challenges.
    These findings suggest areas the committee may wish to 
consider as it develops its oversight agenda. For example, the 
committee may wish to consider the extent to which CMS and HRSA 
will systematically ensure the accuracy of prices reported and 
charged by private sector organizations.
    Specifically, once the proposed rule relating to pricing 
information is finalized for the Medicaid drug rebate program, 
it will be important to examine whether CMS is effectively 
ensuring that all appropriate transactions and price 
concessions are reported, and that clear, up-to-date guidance 
is available in a timely manner.
    As the Medicare Part D benefit begins its second year, it 
is also important to assess the measures CMS will take to 
ensure that the price information Part D sponsors report 
reflects price concessions negotiated with drug manufacturers.
    Finally, the committee may wish to examine the extent to 
which cognizant Federal agencies will effectively monitor and 
detect for abuses in the reporting of drug price information 
that affects Federal programs.
    Mr. Chairman, this concludes my statement. I will be happy 
to answer any questions you or other members of the committee 
may have.
    Chairman Waxman. Thank you very much.
    [The prepared statement of Mr. Dicken follows:]

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    Chairman Waxman. Mr. Morris, be sure the button is pushed.

                   STATEMENT OF LEWIS MORRIS

    Mr. Morris. Good afternoon, Mr. Chairman and distinguished 
members of the committee. I am Lewis Morris, Chief Counsel at 
the Department of Health and Human Services, Office of 
Inspector General. I appreciate the opportunity to appear here 
today to discuss health care fraud in the pharmaceutical 
industry.
    In my written testimony, I describe three areas of fraud 
and abuse perpetrated against the Federal health care programs 
by some in the pharmaceutical industry. In broad terms, these 
areas include pricing schemes, marketing schemes and fraud in 
the delivery and dispensing of prescription drugs.
    Simply put, the Medicare and Medicaid programs have paid 
too much for prescription drugs because of fraud in the 
pharmaceutical industry.
    Working collaboratively OIG, the Department of Justice and 
State Medicaid fraud control units have achieved impressive 
results in the fight against fraud in this industry. The 
investigation and prosecution of these schemes is resource 
intensive, time consuming and requires extensive coordination 
between Federal and State agencies. Furthermore, the parties 
engaged in these frauds are sophisticated, well financed and 
well versed in the vulnerability of our reimbursement systems.
    My colleagues on this panel will describe how these fraud 
schemes operate and the successes we have achieved in 
investigating and punishing corporate wrongdoers. Accordingly, 
I will devote my time this morning to another aspect of the 
government strategy for achieving greater integrity in the 
pharmaceutical industry.
    The OIG has a unique set of administrative authorities to 
sanction health care providers engaged in fraudulent and 
abusive practices. Specifically, OIG has the authority to 
exclude unscrupulous and untrustworthy individuals and entities 
from the Federal health care programs.
    The effect of exclusion is profound because Medicare and 
Medicaid will not pay for items or services furnished during 
the period of an exclusion. An excluded physician or health 
care company is effectively out of business.
    In addition, OIG can use its administrative authority to 
seek substantial monetary penalties for a range of fraudulent 
and abusive conduct, including the submission of false claims 
to Medicare and Medicaid. Of particular relevance to today's 
discussion, we can impose a penalty of up to $50,000 for each 
kickback payment plus up to three times the amount of the 
kickback. These penalties can be substantial in large fraud 
schemes and are a powerful deterrent. These administrative 
sanctions complement criminal and civil antifraud efforts and 
provide an additional avenue for government enforcement.
    OIG is using its authority to impose civil penalties on 
kickback recipients, such as physicians who may previously have 
been under the misimpression that they can demand kickbacks 
from drug companies with impunity. Hopefully, OIG 
administrative enforcement will prompt those physicians and 
others who incorrectly believe they can skate under the 
government's radar to think twice before seeking or accepting 
kickbacks.
    But enforcement standing alone will not address this 
problem. For this reason, OIG continues to promote the 
prevention of fraud and abuse by encouraging voluntary 
compliance efforts by the pharmaceutical industry. To this end, 
the OIG issued a compliance program guidance for pharmaceutical 
manufacturers that provides detailed information for drug 
manufacturers on operating an effective voluntary compliance 
program.
    The guidance identifies fraud and abuse risks, including 
most of the fraud schemes described in my written testimony. It 
also describes concrete steps manufacturers can take to reduce 
their potential liability and thereby promote integrity in the 
system.
    OIG also issues a range of additional guidance, such as 
advisory opinions and fraud alerts. We also undertake frequent 
outreach efforts as part of our overall strategy to encourage 
compliance by everyone who participates in the Medicare and 
Medicaid programs.
    In conclusion, there are no simple fixes to the problems 
you have heard about today. Those intent on abusing the Federal 
health care programs are adept at modifying their schemes to 
respond to changes in reimbursement systems and government 
enforcement efforts. Consequently, Federal and State agencies 
must continue to develop proactive enforcement strategies. 
Strong reasons make for strong action. Of equal importance, 
pharmaceutical manufacturers and other participants in the 
health care systems should be encouraged to embrace policies 
and procedures that promote compliance with Federal program 
rules.
    Thank you for the opportunity to discuss the IG's fight 
against fraud in the pharmaceutical industry. I would be 
pleased to answer any questions.
    Chairman Waxman. Thank you very much, Mr. Morris.
    [The prepared statement of Mr. Morris follows:]

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    Chairman Waxman. Mr. Tenpas.

                 STATEMENT OF RONALD J. TENPAS

    Mr. Tenpas. Mr. Chairman, I appreciate the opportunity to 
appear before you to discuss some of the issues that are the 
focus of today's hearing.
    We at the Department of Justice share the concerns 
expressed by members of the committee this morning that illegal 
conduct by some in the pharmaceutical industry has caused 
government health care programs to pay too much for 
pharmaceutical products.
    I am grateful, Mr. Chairman, for this opportunity to 
discuss our enforcement efforts as you address these issues.
    The commitment of the Department of Justice to root out and 
punish corporate fraud has special urgency in the context of 
health care fraud where the public dollars are so large and 
where fraud can also have a direct and negative impact on 
public health and patient care. That is why the Department of 
Justice, through the Civil and Criminal Divisions, our U.S. 
Attorney's Offices and the Federal Bureau of Investigation, 
continues to fairly and vigorously enforce the laws protecting 
our taxpayers and the patients served by our health care 
system.
    In doing so, our prosecutors and agents work closely with 
Mr. Morris and his colleagues at the Office of Inspector 
General at the Department of Health and Human Services, with 
Mr. O'Connell and his fellow State law enforcement officials, 
and with the various State and Federal agencies who bear the 
cost of the types of schemes I more fully discuss in my written 
testimony. We also continue to work closely with ``qui tam'' 
whistle-blowers and their counsel.
    Many of these whistle-blowers have come from deep inside 
the pharmaceutical industry, and their assistance has been 
invaluable. As I know you are aware, Mr. Chairman, in 1996, 
Congress established the Health Care Fraud and Abuse Control 
program. The so-called HCFAC program provides a dedicated 
funding stream to the Department of Justice and others for work 
in this area.
    Since that time, our Criminal and Civil enforcement 
efforts, funded through that program, have returned nearly $10 
billion to the Federal Government, including $8.85 billion 
transferred the Medicare trust fund. We have secured more than 
4,500 criminal convictions. Just last year, for example, in 
fiscal year 2006, our health care fraud enforcement efforts 
resulted in recoveries of $2.2 billion. Our U.S. Attorney's 
Offices opened more than 830 health care fraud investigations 
and charged a total of 579 defendants criminally.
    Now, those numbers represent our overall health care fraud 
enforcement efforts. In the area of pharmaceutical fraud alone 
since 1999, we have recovered over $5.3 billion in matters 
involving losses to Federal and State programs. We have many 
matters under investigation, implicating pricing and marketing 
practices related to hundreds of drugs. Clearly, by any 
measure, funding for health care fraud enforcement has produced 
a multifold return for taxpayers and will continue to do so.
    A good way to get a feel for the scope of our 
pharmaceutical enforcement efforts is through a review of the 
cases we have resolved in recent years. My written testimony, 
therefore, describes a number of those cases in detail.
    In my opening comments, I want simply to summarize several 
broad categories into which these cases fall. First what one 
might describe as kickback violations, situations in which a 
drug company or its representative make payments to somebody 
with the power to influence the choice of drug for a patient, 
such as the primary prescribers, individuals making pharm 
formulary decisions, or pharmacists.
    Second are off-label promotion violations. These are 
deliberate marketing efforts to sell a product for a use that 
has not been approved by the FDA. As with kickback violations, 
we are concerned that such marketing efforts can undermine a 
doctor's judgment in providing the best medical advice possible 
to his or her patient and thereby undermine quality of care.
    As I more fully explain in my written testimony, these off-
label matters are concerned solely with the marketing efforts 
of pharmaceutical companies to capture larger market share for 
their products, often in the face of contradictory science.
    The third broad category of our cases involve pricing 
violations. Frequently these schemes arise from the legal 
requirements to report to the Medicaid program the best price 
for the particular drug, as well as the pharmaceutical 
company's average manufacturer price. Whether by hiding 
discounts provided to certain customers, hiding sales through 
manipulation of NBC codes, failing to incorporate free samples 
into price computation or other acts, the common element of 
these schemes is, the government fails to get an accurate 
accounting of the prices on which rebates to Medicaid are 
determined.
    These inaccuracies can have pass-through effects to the 
340B program.
    The fourth category are manufacturing process violations 
where a pharmaceutical manufacturer departs from an FDA-
approved process.
    In conclusion, let me thank you again for the opportunity 
to be here today. Health care fraud, including violations 
related to pharmaceuticals, has been and will continue to be an 
area of great importance for the Department of Justice. We 
appreciate your interest and I welcome your comments and 
questions.
    Thank you.
    Chairman Waxman. Thank you very much Mr. Tenpas.
    [The prepared statement of Mr. Tenpas follows:]

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    Chairman Waxman. Mr. O'Connell.

               STATEMENT OF PATRICK J. O'CONNELL

    Mr. O'Connell. Thank you, Mr. Chairman, members of the 
committee, on behalf of Attorney General Greg Abbott of Texas I 
thank you for the opportunity to come testify to you today.
    And I want to make sure that you understand--and I know you 
do--that the Federal Government is paying a whole lot of money 
for these programs, the States are also paying a whole lot of 
money for these programs.
    Texas is basically a 60/40 State. So every dollar that gets 
spent in Texas for drugs that we have overpaid for, 60 cents of 
that dollar is being paid for by the Federal taxpayers and 40 
percent is being paid by Texas taxpayers.
    In fiscal year 2005 the Texas Medicaid program paid $2.41 
billion for pharmaceutical products. The sheer volume of those 
dollars involved provides a huge enticement for those that 
would attempt to defraud the program.
    To give you a little history about what we have done in 
Texas, in 1997, then-Governor Bush signed into law the Texas 
Medicaid Fraud Prevention Act with its ``qui tam'' provisions, 
one of the first States to do that.
    In 1999, in response to concerns about growing claims of 
fraud and abuse, the Texas attorney general created the Special 
Civil Medicaid Fraud Section within the Attorney General's 
Office, and I have had the privilege of heading up that section 
since its inception. We have investigated and pursued and 
recovered claims against doctors, dentists, hospitals and other 
providers involving typical claims of false billing, false cost 
reporting and overbilling. However, the overwhelming majority 
of our time and efforts have been concentrated on drug 
manufacturers.
    I want to make it clear. Did we target or place special 
emphasis on drug manufacturers on purpose? No, we did not. What 
happened was, whistle-blowers brought us cases, insiders from 
these companies showed us that significant fraud was being 
perpetrated on the Texas Medicaid program, and so we choose to 
pursue those cases which provided the greatest recovery for the 
Texas Medicaid program. Most of our time has been spent on 
pricing cases, and we have recovered in excess of $64 million. 
It doesn't sound like a whole bunch when compared with the 
billions of dollars that have been recovered nationwide, but we 
have spent almost all that time in two lawsuits. And Mr. 
Moorman made a couple of comments and I would like to 
reiterate. In those two lawsuits we have spent over 6 years 
fighting six drug manufacturers. We have settled with four of 
them. We are still fighting with two of them.
    And my office, I had three or four lawyers to work on those 
cases. The Texas attorney general has now upped our section to 
10 lawyers and we are doing, you know, the best we can to 
continue to pursue this litigation. But the fact is that in one 
current case, for example, one of the drug manufacturers, we 
have seen 18 lawyers on the other side show up in court or file 
pleadings or be in negotiations with us. And I have enough for 
three lawyers to work on that case. So we are pedaling as fast 
as we can, but we are struggling with those resource issues.
    We have also developed--and I want to reiterate again that 
we have developed close working relationships with the 
Department of Justice and with the other States. We are doing 
this in the most efficient, best way we can to try to recover 
those dollars. Typically, if a fraud has been perpetrated on 
the State of Texas it has likely been perpetrated in every 
other State as well. And in that cooperative effort, the 
amounts that we have recovered from efforts by both the Federal 
Government and by Texas, working in concert with each other, 
far exceed $100 million just in Texas alone. And I think we are 
only about 6 to 7 percent of the total Medicaid budget.
    While we have been fighting these battles over the last 5 
or 6 years, the question might come to you, gee, is that all 
the fraud? Are you going to catch up and collect that money and 
then we can go on down the road? And, of course, the answer is 
``no,'' that, as other members of the panel have indicated, we 
are seeing from whistle-blowers continuing claims of fraud in 
the pharmaceutical industry. And those include the ones you 
have already heard about, mainly in rebate fraud, pricing 
fraud.
    And I want to pay special attention today--and it is in my 
written comments to off-label marketing which we see as a 
particularly strong area that we have to look at. Not only does 
it cost the taxpayers a tremendous amount of money, but we are 
seeing evidence, not just in the cost of the drug, but in the 
cost of the medical care that we are having to give to our 
Medicaid beneficiaries who have been enticed by inappropriate 
off-label marketing to use these drugs, that then cause further 
medical problems for our Medicaid patients.
    Again, thank you for the opportunity to visit with you 
today. And I am available for questions.
    [The prepared statement of Mr. O'Connell follows:]

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    Chairman Waxman. Thank you very much for your testimony.
    All four of you are involved in trying to stop fraud in the 
health care area and particularly with prescription drugs. And, 
Mr. Tenpas, we heard testimony from Mr. Moorman earlier that 
there is a big backlog of these cases. You testified that when 
you pursue them successfully, it brings back a lot of money to 
the taxpayers of this country. Why is there that big backlog?
    Mr. Tenpas. Well, I think, as Mr. O'Connell just captured, 
these are very complex cases. I think the fraud cases that the 
department deals with certainly rank amongst the most complex 
because the regulatory regime is complicated. As you have 
heard, there are----
    Chairman Waxman. But is it less? Is it the case that less 
resources are going to the Justice Department to pursue these 
cases?
    Mr. Tenpas. Absolutely not. With all respect to Mr. 
Moorman, he is simply wrong in suggesting that there has been 
any hold-back of the money in the health care fraud account of 
dollars provided to the United States.
    If I may, I think that the confusion here may arise from 
some testimony that has been provided earlier by the Department 
of Justice officials about the amount of money going to our 
U.S. Attorney's Offices for civil cases specifically. And I 
think there may be some confusion that suggested that was the 
only money going to our U.S. Attorney's Offices. In fact, no, 
there is a substantial additional portion that goes to them to 
do criminal health care fraud enforcement work.
    Chairman Waxman. But the civil cases get the money back. 
And that is really important to get that money back because if 
the companies realize they can't get away with fraudulently 
taking money from the government, that there is a chance they 
can get caught, that would certainly be more money for the 
government and, hopefully, less fraud. So, is it accurate that 
there is less money going to pursue civil litigation from the 
Justice Department on the health care fraud?
    Mr. Tenpas. No, there is not less money. We have been 
fairly constant in the dollars devoted to our civil enforcement 
efforts. In addition, there is--we do criminal cases; we do 
them in parallel.
    Chairman Waxman. You acknowledge there is a backlog of 
cases?
    Mr. Tenpas. We do have a large number of cases that we have 
in our inventory right now that we would like to handle. We 
have some increased funding coming on stream thanks to 
Congress.
    Chairman Waxman. Well, DOJ reported to the House Judiciary 
Committee that the backlog is 180 cases. Does that sound right?
    Mr. Tenpas. I think it is a little bit lower than that. We 
put--at this point, put it at little closer to 150, but it is 
in the ballpark obviously. It goes up and down.
    Chairman Waxman. What does the large backlog and what 
impact does that have on the thinking of pharmaceutical 
manufacturers that are contemplating fraudulent activities?
    Mr. Tenpas. I think I would have to defer to them. 
Obviously, we like to get cases resolved as quickly as we can 
and get to the bottom of that.
    I would observe----
    Chairman Waxman. Mr. O'Connell said that he has 10 
attorneys pursuing these issues for Texas alone. How many does 
DOJ have for the country?
    Mr. Tenpas. We have approximately 50 attorneys in the Civil 
Division and here in Washington, DC, every U.S. Attorney's 
Office in the country has a health care fraud coordinator, so 
there are 93 there.
    Chairman Waxman. How many are pursuing these issues 
directly?
    Mr. Tenpas. I am sorry?
    Chairman Waxman. How many of those lawyers are pursuing 
these pharmaceutical issues?
    Mr. Tenpas. I don't know that I can give you a precise 
count on that. It is going to move at any time.
    Chairman Waxman. Let's get it for the record.
    Mr. Tenpas. I would be happy to try to followup.
    Chairman Waxman. Thank you.
    Mr. O'Connell, if they have so few attorneys for the whole 
country, what impact does that have on you?
    Mr. O'Connell. Well, obviously we feel the pain of having 
to try these cases with the resources that we have. And every 
time a State attorney general has to devote resources to the 
case--and again the Federal Government has the ability to 
collect the 60 cents of the dollar that has been taken away 
from Texas, but they don't have the ability to collect the 
State's 40 cents in Texas. We have to collect that ourselves.
    Every time that we have to go do it, then we have to take 
resources away from and dollars away from other programs, just 
like the DOJ folks do. And so the more they can pursue cases, 
the better for me; the more I can pursue cases, the better for 
them.
    And again that is why I said we try to coordinate so that 
if I know the Department of Justice has spent a lot of time on 
a particular case, and I have the same case under seal in my 
office, I will go try to work on something else.
    Chairman Waxman. What you said is that these cases aren't 
cases that the government has worked on to figure out what is 
happening; they are cases that are brought to you by whistle-
blowers. Now, can you imagine a whistle-blower coming in and 
saying, I know there is this fraudulent activity going on. And 
then they see that the cases sit there in a backlog for years. 
That has to be discouraging to the whistle-blowers and 
encouraging to the fraudulent drug companies.
    I am going to recognize my colleagues because my time has 
expired. Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman.
    Now, Mr. Morris, I want to ask you about illegal kickbacks 
where pharmaceutical companies offer some type of inducement to 
the drug companies to prescribe medicines they might not 
otherwise.
    One of the largest settlements of this type involved a 
company called Serono and resulted in a $700 million 
settlement, the Department of Justice was able to get.
    Can you tell me about the allegations in that particular 
case that led to such a massive settlement?
    Mr. Morris. The Serono case? I am not sure, but I think the 
settlement amount may have been less. Would you be referring to 
the TAP pharmaceutical case, dealing with a prostate cancer 
drug, or the Serono case which dealt with AIDS wasting drugs?
    Mr. Yarmuth. I was referring to the Serono case. I may have 
them mixed up.
    Mr. Morris. I can give you a brief synopsis of both if that 
will help.
    Mr. Yarmuth. We are trying to get information about the 
types of activities you prosecute and we need to deal with.
    Mr. Morris. Certainly.
    First with your question related to Serono, Serono 
manufactures an AIDS wasting drug, which obviously is a benefit 
to the AIDS population. There were evolutions in the 
pharmaceutical area, in that area, that were facing competition 
and loss of market share, as part of their effort to maintain 
and regain that, they engaged, we allege, in a number of 
illegal behaviors including inappropriate marketing of the 
drug. They also targeted physicians who were in a position to 
prescribe the drug and offered them substantial kickbacks and 
incentives to do so.
    One part of their marketing strategy was referred to as the 
6 million in 6 days. They targeted high-prescribing physicians 
with the objective of getting $6 million in prescriptions in 6 
days. Those doctors who participated in this scheme were given 
all-expense-paid trips to Cannes, France, with associates to 
participate in a medical conference.
    The other drug--the other company I referred to was TAP 
Pharmaceutical. The drug in that case was Lupron, which is a 
prostate cancer drug. Also, in response to marketing 
competition from another pharmaceutical manufacturer, it is 
alleged--and we believe there was substantial evidence to 
demonstrate--that TAP Pharmaceutical gave kickbacks to doctors 
in the form of broad spreads between the charge that they 
billed the doctor for and what the doctor could then realize by 
billing the Federal health care programs, as well as other 
sorts of incentives to get physicians either to continue to 
prescribe their drug, or--what we feel is even more upsetting--
to switch patients from the competitor's drug to the TAP drug 
so as to realize personal profit.
    Perhaps the most alarming aspect of that case is that TAP 
illegally gave physicians samples, which one would expect to be 
given free to patients, but knowing that the physicians would, 
in turn, bill those samples to the programs. And the senior 
citizens, many of them on fixed incomes, would then be required 
to pay a 20 percent copay or $100 for a drug which, in fact, 
did not cost the physician anything.
    Mr. Yarmuth. I am curious about where the bar is for what 
constitutes an illegal marketing practice. Anybody who has been 
in a doctor's office has seen very attractive men and women 
bringing cookies in to physicians and their nurses. I was aware 
of--I think everyone is pretty much aware, but I know of one 
case in my community in which a restaurant was hosting an event 
for a pharmaceutical company and the pharmaceutical reps, and 
this was to invite physicians to have a ``continuing education 
program,'' so-called; and they are told that we only had $130 a 
person to spend to entertain each of these physicians.
    Now, in Washington and New York that is probably normal. 
But in Louisville, KY, that is about twice what you would ever 
expect to spend. So I am curious to where the bar is as to what 
constitutes illegal activity and what may be some of the other 
types of illegal marketing activities you have seen.
    Mr. Morris. Well, the range of illegal marketing activities 
are only limited by the imagination of those who are trying to 
prey on our program.
    The critical aspects of the kick--when we look at a case or 
marketing scheme for kickbacks, I recall, first, that this is a 
criminal statute. It requires specific intent. And so we look 
to see whether the purpose of the marketing scheme is to induce 
referrals or the ordering of prescription drugs.
    Certainly the other aspect of our analysis is to see 
whether the marketing scheme is intended to induce 
overutilization, induce distortion of the physician's medical 
decisionmaking so he or she is thinking more about their 
personal profit rather than the well-being of their patient. 
But they are necessarily case-by-case determinations.
    And one of the challenges that we face with our partners at 
the Department of Justice is doing that factual analysis so 
that we can appropriately target our resources on those 
kickbacks which are most egregious.
    Mr. Yarmuth. Thank you.
    Chairman Waxman. Thank you, Mr. Yarmuth.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Mr. Tenpas, I thought I heard in your oral testimony that 
in the last 10 years the Department of Justice has recovered 
about $8.5 billion for the taxpayer in various health care 
fraud recoveries.
    Mr. Tenpas. Yes, actually about $10 billion total; $8.85 
billion of that ended up returned to the Medicare trust fund.
    Mr. Cooper. Wow, that is a lot of money. Are you aware of 
any other area of our economy that has been guilty or caused so 
many infractions against the law resulting in such large 
recoveries?
    Mr. Tenpas. There probably is not an area that in terms of 
recoveries to the United States has produced as much as the 
health care fraud arena. One way of sort of getting a sense of 
that, for example, last year, our recoveries were slightly over 
$3 billion and slightly over $2 billion of that was health care 
fraud-related recoveries. And of that $2 billion, there was one 
major pharmaceutical recovery that played a big role in the $2 
billion figure.
    Mr. Cooper. And of this total of roughly $10 billion in 
health care fraud recoveries, over half of that or over $5 
billion has come from the pharmaceutical industry?
    Mr. Tenpas. Certainly over half. The $5.3 number that I 
provided went back only to 1999. So there is probably a little 
bit more on top of that in the couple of years before 1999, but 
ballpark you have it about right.
    Mr. Cooper. So even though pharmaceutical companies receive 
roughly 11 percent of total health care reimbursement, they 
have been guilty of infractions or fraud that are over 50 
percent of the recoveries that you have achieved. They get 
$0.11 of the health care dollar, but here, half the recoveries 
or more are from this one industry.
    Mr. Tenpas. You have the math about right, yes.
    Mr. Cooper. We heard testimony prior that when you 
prosecute these cases or bring civil cases that the recovery 
for the taxpayer is at least $15 for every dollar invested in 
government lawyers. And it might be as high as $25 for every 
dollar of government lawyers. To your knowledge, is that 
roughly about right?
    Mr. Tenpas. We probably would be a little more modest. I 
guess you won't often hear this, but we probably wouldn't put 
it quite as high as 15-to-1. I think it depends on which 
dollars you count as part of our base. But we would certainly 
agree it is a multifold recovery rate.
    Mr. Cooper. So that would seem to indicate the government 
interest in having more attorneys to recover more money. Until 
you start, recovery is declining.
    Mr. Tenpas. Yes. The President's budget last year had 
proposed an $11 billion--I am sorry, $11 million--increase for 
the Department of Justice. Because of the concurrent resolution 
way of dealing with the budget, that money ended up not being 
appropriated to us. The President's budget this year proposed 
about a $17.5 million increase. It would be very helpful to us 
if that were fully funded.
    Mr. Cooper. The President's budget, as we heard earlier, 
also recommends eliminating the best price, which would set us 
back in terms of recovering money for the taxpayer. Well--so it 
is a good idea to have more government attorneys.
    It is our information that of the 75 attorneys you have in 
your False Claims Act fraud staff that only about 10 or 12 of 
those folks actually work on health care false claims. Is that 
roughly correct? Because there are many types of false claims, 
and here we have established that health care false claims are 
remarkably productive for the taxpayer.
    Mr. Tenpas. I don't think--I don't think those numbers are 
accurate. But I am reluctant to give you specifics right here 
today. I would ask for the opportunity to go back and followup 
with you.
    Mr. Cooper. If you could supply those numbers for the 
record that would be helpful because the attorney general on 
your left, from Texas, has just testified for his whole State 
he has gotten 10. So it would be indeed tragic for America if 
we only had, you know, 10 or 12 or 15 working on this, since 
these cases seem to be so productive for the taxpayer.
    Mr. Tenpas. We agree with you.
    And one other thing I would just point out, in thinking 
about the department's resources devoted to this, you also need 
to take account of our U.S. Attorney Offices. We have 93 of 
them across the country----
    Mr. Cooper. We understand that only a small handful are 
active on these cases. A lot of them claim to be, and they are 
encouraged by DOJ, but in terms of successful prosecutions and 
recoveries, it is a small handful. Philadelphia deserves 
credit, Boston may; but aside from those offices, we are having 
trouble finding real efforts.
    Mr. Tenpas. I think part of that is certainly true. Those 
offices have been very successful. Part of what we find here is 
that these cases, because they have national implications, you 
have national marketing practices and such, we often have sort 
of some options about which office might best handle something. 
And because we have developed substantial expertise now in 
those two offices, there is a certain logic as to some of these 
cases to then go ahead and place the next case there with 
attorneys there.
    Mr. Cooper. Final question: I see my time has expired.
    Do you have any idea how many former DOJ attorneys have 
then gone to work for the pharmaceutical companies?
    Mr. Tenpas. No.
    Mr. Cooper. Can you help us with that information for the 
record, please?
    Mr. Tenpas. I don't know of any way that we could determine 
that information. We don't typically track the ongoing 
employment.
    Mr. Cooper. There is no alumni group of DOJ?
    Mr. Tenpas. There is an alumni group of former U.S. 
attorneys, but there isn't much of a group with respect to the 
career prosecutors who may leave our department.
    Mr. Cooper. So you don't think taxpayers should worry about 
a revolving door here?
    Mr. Tenpas. I think that is not the first place, if I were 
in your seat, that I would worry about. We find that they are 
going to have talented counsel whether they are former 
Department of Justice officials or not in the pharmaceutical 
industry. And you don't want to provide a disincentive to 
talented people coming and joining the department by telling 
them that you are going to have a lot of limits on what you do, 
what you do next.
    We make sure that if somebody leaves the department they 
are recused from any matters that they were working on while in 
the department. They can't go out you know represent the folks 
that they were investigating the week before.
    Mr. O'Connell. I am happy to report that none of the folks 
who have left my section have gone to work for drug companies.
    Mr. Cooper. Good for you, Mr. O'Connell.
    Chairman Waxman. Thank you, Mr. Cooper.
    Mr. Welch.
    Mr. Welch. Thank you, Mr. Chairman. We have been told today 
about a number of cases of Medicaid fraud that have been 
successfully prosecuted by DOJ and, in this case, the State of 
Texas. There are very few ways to uncover the fraud. Usually, 
the cases are identified as you mentioned only when whistle-
blowers come forward.
    Mr. O'Connell, as a prosecutor for these cases, can you 
give us some insight? I am wondering, do the fraud cases that 
are successfully prosecuted represent just a part of the full 
spectrum of Medicaid drug pricing fraud? And is it likely that 
there are many fraud cases out there that we just haven't 
discovered?
    Mr. O'Connell. I think it is fair to say that there are a 
lot of them out there, that have not been discovered. And as 
long as the False Claims Act, both in the States and in the 
Federal situation, is strong and provides for recoveries for 
whistle-blowers, we will keep seeing them. And, yes, I think we 
are going to see more we haven't even thought of.
    At my office, for example, we spend almost all of our time 
on what are known as AWP cases, or pricing cases, because those 
are the ones we started with; and once we opened those lawsuits 
up, those were the ones that ended up in litigation.
    And in the process now we are seeing the off-label 
marketing cases, the rebate fraud cases, the ANP cases. So 
there is a myriad of different ways. And as my mates here said, 
we can't always think of every potential case of fraud that is 
out there.
    Mr. Welch. Mr. Tenpas, can you offer any perspective on 
this?
    Mr. Tenpas. Well, we certainly believe there is still fraud 
out there to be found. And Mr. O'Connell is right that the 
whistle-blower community is an important resource for us in 
identifying those, there are other places we get referrals you 
know, anonymous tips, trying to look at data that HHS, itself 
collects----
    Mr. Welch. Let me ask you this. Can you offer any specific 
recommendations that would make it easier for your offices to 
uncover the fraud that is ripping off the taxpayers?
    Mr. Tenpas. I think the best thing probably for us--well, 
first would be to have some funding for prosecutors and 
investigators so that we can respond to the cases and referrals 
that we get through sort of the ``qui tam'' process so that is 
probably the single most helpful thing that the department 
could ask for at this point.
    Mr. Welch. Any changes in legislation?
    Mr. Tenpas. We don't have anything that we are proposing at 
this point. Particularly with the focus on Part D, we are 
clearly concerned that there could be fraud in that program, 
but only being a year into it and the first major 
reconciliation not having occurred yet with the pharmacy 
companies, we don't have many of the conclusions yet in that 
arena.
    Mr. Welch. OK.
    GAO's prior reports on Medicaid drug rebates in the 340B 
program identified some important oversight inadequacies and a 
record of poor implementation. Three reports by the HHS OIG on 
the 340B program identified similar problems.
    Mr. Dicken, how did these oversight inadequacies contribute 
to an environment that potentially allows for abuse?
    Mr. Dicken. Well, as you have noted that some of our past 
reports and work for our colleagues in OIG have found that 
there is a lack of clarity in some of the guidance and some 
limited oversight. And in that environment there can be 
different assumptions that manufacturers may be making. That is 
something that we found when we looked at what was reported for 
the Medicaid drug rebate program. There were different 
assumptions made by different manufacturers, gives more 
circumstances that there may be unintentional errors and would 
seem to create an environment where there could be more 
potential for abuse.
    Mr. Welch. Mr. Morris, any thoughts?
    Mr. Morris. On strengthening 340B or the broad question of 
addressing fraud?
    Mr. Welch. What Mr. Dicken was commenting on.
    Mr. Morris. We would concur that there needs to be both 
greater transparency in the pricing mechanism and the way that 
the ceiling prices are established. We have also recommended in 
our reports that HRSA have the ability to impose sanctions on 
manufacturers who do not provide accurate information or do not 
provide it in a reasonable time.
    So, confidentiality and transparency.
    Mr. Welch. Thank you. Mr. O'Connell anything to add?
    Mr. O'Connell. I was going to add in our pricing cases. One 
of the things that I think has been helpful to our success is 
that the Texas Medicaid program was the only State to require 
manufacturers to certify certain prices to them.
    And so we have forms that are required to be filled out by 
the manufacturers.
    Mr. Welch. Do you make the President and CEO sign that?
    Mr. O'Connell. No. Unfortunately, it is usually some person 
down in the marketing department or in the sales department 
that----
    Mr. Welch. Should it be the President or CEO?
    Mr. O'Connell. I would certainly think that would be an 
outstanding thing to do because, in fact, what ends up 
happening is the person signing the document is the one who 
doesn't know what the real prices are and doesn't realize that 
they are giving us a false price. That has been the testimony 
so far in these cases.
    Mr. Welch. Thank you. I yield my time.
    Chairman Waxman. Thank you very much. The four of you have 
been revealing fraud primarily in drug prices in Medicaid or 
the community clinics because there the government's directly 
being defrauded. It is hard enough to pursue those cases 
because for the most part you have to get a whistle-blower to 
come forward and tell you about it. And then you can pursue it 
through government functions either at the State or the Federal 
level. And we do have a ``qui tam'' ability for lawyers to 
bring the lawsuits on behalf of the government.
    But if you looked to Medicare, the Medicare Part D 
pharmaceutical program is going to cost a trillion dollars over 
the next 10 years. I think it is $50 billion for this next 
year. That program has to be as ripe for fraud as any other. 
But, Mr. O'Connell, you will be out of it because it is not 
going to be a State issue, and since the--most of this is all 
through private insurance plans, Mr. Morris, if there is fraud 
going on, what role will you at the Federal Government level 
have to combat it, or even to know about it?
    Mr. Morris. Well, I think I can answer it this way. We are 
bringing our enforcement and our oversight experience that we 
have gained in the Part B Medicare and the Medicaid programs to 
bear on the Part D programs, so it rolls out effectively and is 
the best deal possible for taxpayers.
    Our approach is to cover five broad areas of the Part D 
benefit. Those include enforcement and compliance, payment 
accuracy and controls, beneficiary access and protections, drug 
pricing and reimbursement, and information technology and 
systems.
    We currently have about a dozen different projects under 
way with our auditors, our program evaluators and our 
inspectors, looking to make sure that the system is going to 
work well.
    Chairman Waxman. This is Part B or Part D?
    Mr. Morris. I am sorry sir, Part D. So we already have a 
fairly robust set of programs under way to ensure the integrity 
of the Part D program.
    Our work plan gives a great deal more detail about those, 
and we would, of course, be pleased to give you more 
information if you would like.
    Chairman Waxman. I would like that. If you have a work plan 
in writing I would like to receive it.
    Mr. Morris. We would be pleased to submit that for the 
record.
    [The information referred to follows:]

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    Chairman Waxman. What if there is a collusion? You have a 
private insurance plan offering the Part D benefit and they 
make a deal with the drug companies that they will steer people 
to the higher priced drugs and they will get discounts, but 
then the discounts aren't even passed on to the government or 
the beneficiary, but allow them to make more profit, and it is 
not visible.
    Do you have any ability to be able to pierce that?
    Mr. Morris. Well, I think you have hit on a theme that has 
run through all of this testimony, the value of transparency.
    Chairman Waxman. Don't you think this Medicare Part D 
system is very opaque? There is very little transparency 
because it is being handled by these private insurance plans, 
as opposed to the government?
    There is very little transparency because it is being 
handled by these private insurance plans as opposed to the 
government through Medicare Part B or Medicaid.
    Mr. Morris. I don't personally have sufficient experience 
in the Part D program to be able to answer that. I will tell 
you that, based on our enforcement experience, that the greater 
the transparency, the more able government auditors and 
evaluators are to get raw data, the better we are able to 
ensure that the programs work the way they are intended. This 
applies to the Part B program, the Medicaid programs and 
certainly the new Part D program.
    So having access to that data is critical not only to 
address system vulnerabilities, but it is also part of our 
enforcement strategy. While we do rely on whistleblowers for a 
tremendous amount of information, one of the other ways we 
engage in fraud detection is by doing systemic analysis of data 
and seeing where there are aberrations and targeting our 
investigative resources and the Department of Justice's 
prosecutive resources. So access to data, viable data is very 
important.
    Chairman Waxman. Will you receive the data that the drug 
companies have submitted to the CMS about their pricing?
    Mr. Morris. We are currently working with CMS to ensure 
that we get access to that data.
    Chairman Waxman. Well, I thank you all very much. I would 
just conclude by saying that I think this Medicare Part D, 
which is the most expensive program we have ever had for 
purchasing prescription drugs, is so complicated and so 
difficult to find any transparency in it that it just calls out 
for more fraud and a harder job for those who are trying to 
detect it and protect the taxpayers.
    Thank you all very much. Anybody else have any other 
questions?
    Mr. Cooper. A quick final point. I think the Department of 
Justice has a sister agency, the IRS, which has done an 
excellent job pointing out what is called the tax gap, the 
amount of moneys that are owed to the government but not 
collected. I would encourage the DOJ to find out more about 
that model. Because I am worried that there is a significant 
enforcement gap. Because if Mr. Moorman is even close to 
correct, that with an ill-defined backlog, you have no concrete 
idea of a possible $60 billion that are not collected of 
taxpayer money, that is a truly significant sum, especially in 
true view of your past successes. So with a few more attorneys, 
let's find out what that enforcement gap is.
    Chairman Waxman. Thank you very much. We appreciate your 
participation, and this hearing has been very useful to us.
    Without objection, we will hold the record open for 7 days. 
Some Members may wish to submit questions to you and the 
previous panel, and we would appreciate a response in writing. 
Thank you. With that, that concludes our business. The 
committee stands adjourned.
    [Whereupon, at 1:05 p.m., the committee was adjourned.]
    [Note.--No response was received for the following 
questions:]

[GRAPHIC] [TIFF OMITTED] T5340.122

                                 
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