[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
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/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:]
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