[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
MEDICAID DRUG REIMBURSEMENTS:
ARE CMS CUTS BAD MEDICINE FOR SMALL
BUSINESSES AND BENEFICIARIES?
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 18, 2007
__________
Serial Number 110-36
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DEAN HELLER, Nevada
YVETTE CLARKE, New York DAVID DAVIS, Tennessee
BRAD ELLSWORTH, Indiana MARY FALLIN, Oklahoma
HANK JOHNSON, Georgia VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
JIM JORDAN, Ohio
______
Subcommittee on Urban and Rural Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DEAN HELLER, Nevada
HANK JOHNSON, Georgia DAVID DAVIS, Tennessee
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLIE GONZALEZ, Texas LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
PANEL I
Smith, Dennis, U.S. Department of Health and Human Services...... 5
PANEL II
Osterhaus, Matthew, Owner, Osterhaus Pharmacy.................... 23
Civello, Anthony N., National Association of Chain Drug Stores... 25
Sewell, Charlie, National Community Pharmacists Association...... 27
Hagan, Ed, Food Marketing Institute.............................. 30
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 38
Chabot, Hon. Steve............................................... 40
Altmire, Hon. Jason.............................................. 42
Braley, Hon. Bruce............................................... 43
Smith, Dennis G., U.S. Department of Health and Human Services... 45
Osterhaus, Matthew, Owner, Osterhaus Pharmacy.................... 49
Civello, Anthony N., National Association of Chain Drug Stores... 55
Sewell, Charlie, National Community Pharmacists Association...... 61
Hagan, Ed, Food Marketing Institute.............................. 69
Statements for the Record:
National Grocers Association..................................... 76
(v)
FULL COMMITTEE HEARING ON MEDICAID
DRUG REIMBURSEMENTS: ARE CMS CUTS
BAD MEDICINE FOR SMALL BUSINESSES
AND BENEFICIARIES?
----------
Wednesday, July 18, 2007
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., inRoom
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
[Chairwoman of the Committee] Presiding.
Present: Representatives Velazquez, Shuler, Gonzalez,
Cuellar, Braley, Clarke, Chabot, Davis, Fallin, and Buchanan.
OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
ChairwomanVelazquez. Good morning. I call this hearing to
order to address Medicaid Drug Reimbursement: Are CMS Cuts Bad
Medicine for Small Businesses and Beneficiaries?
The matter we discuss today stems from the legacy of the
last Congress. In February 2006, President Bush signed the
Deficit Reduction Act, which directed the Centers for Medicare
and Medicaid Services to recalculate the way it reimburses
pharmacies for providing generic prescription drugs to Medicaid
beneficiaries.
While evidence indicates that the old formula used by CMS
resulted in some level of overpayment, the new formula clearly
cuts too far. On July 6, the Centers for Medicare and Medicaid
Services released a final rule which radically changed the old
formula and could prove devastating to pharmacies and Medicaid
recipients.
The new formula significantly reduces the reimbursements to
the point where the General Accounting Office has determined
pharmacies will be paid back for only 64 percent of their costs
of acquiring generic prescription drugs. That represents a 36
percent shortfall.
I have many concerns that the impact of this rule could
have on small businesses offering prescription drug coverage.
These pharmacies have low profit margins and small retailers
will be hit particularly hard. They tend to serve a higher
proportion of Medicaid beneficiaries and get more of the
revenue from prescription drugs. As a result of this change,
many could be forced to close their doors.
This will not only hurt pharmacies, but it will affect
overall access to care for Medicaid recipients. If these
businesses close or drop out of the program, drug coverage will
be reduced. Medicaid is a critical component of our national
health care system serving over 50 million. Without it, the
vast majority of these people would join the ranks of the 46
million uninsured Americans.
What doesn't make sense to me is that while the intent of
this new formula is to save money it, in fact, encourages the
use of more expensive brand name drugs. The average Medicaid
generic prescription is $20, while the average brand
prescription is $120. While this may be good for the
pharmaceutical companies, costs will be increased for the
Federal Government and the states.
I believe the HHS Inspector General's report is a good
starting point for us when we examine possible solutions to
this problem. The IG recommends that CMS should find a better
way to reflect the actual costs of these drugs. The IG's
recommendation will remove outliers in drug prices that do not
reflect the realities of the marketplace. It also provides an
opportunity for pharmacies to alert the states and CMS when
they can demonstrate their inability to acquire drugs at prices
at or below reimbursement levels.
Tellingly, the IG says new federal reimbursement limits
should be monitored closely. Their report noted that such costs
could lead to access problems for Medicaid beneficiaries. These
findings are also supported by the General Accounting Office.
As the rule is written, it threatens the ability of thousands
of small pharmacies to keep operating.
While the previous reimbursement formula may have overpaid
pharmacies for generic drugs, the new one will make the issue
worse. Our government should not be eliminating one problem
only to create another. The General Accounting Office and HHS
have shown there are better ways to ensure pharmacies are
adequately paid for these generic drugs.
Unfortunately, CMS is prepared to move forward despite
these objections. Today's hearing will hopefully shine some
light on why the CMS should reconsider the rule.
I look forward to today's testimony and thank the witnesses
for their participation. And now I yield to Mr. Chabot for his
opening statement.
OPENING STATEMENT OF MR. CHABOT
Mr.Chabot. Thank you, Chairwoman Velazquez, both for
yielding and for holding this hearing on the Centers for
Medicare and Medicaid Services, the CMS, rule implementing the
Deficit Reduction Act's modification of the reimbursement
limits for certain prescription drugs in the Medicaid program.
This hearing continues a long-standing effort by this
Committee to convince CMS that good regulatory practice
requires the agencies to promulgate rules that do not adversely
affect the thousands of small business providers of necessary
health care in the United States. Drug prices represent a
rapidly increasing portion of monies devoted to health care in
the United States. It is not surprising to find, then, that the
Medicaid program also faces rapidly rising costs for drug
reimbursement.
Under the Medicaid program, states are authorized to
provide for reimbursement of prescription at levels established
by CMS under authority delegated from Congress. According to
the Government Accountability Office, the GAO, the cost of such
reimbursement in the Medicaid program rose by 870 percent in
the 15-year period from 1990 through 2004.
Congress recognized that such growth was not sustainable,
and in the Deficit Reduction Act of 2005--an act which I
supported--it modified the payment from 150 percent of the list
price to 250 percent of the average manufacturer's wholesale
price, referred to by its acronym AMP. Savings are enhanced by
calculating the 250, not on average of all drugs in therapeutic
class, but, rather, on the lowest AMP in a therapeutic class.
The Congressional Budget Office, the CBO, estimated that
the modification will represent about $1 billion in savings for
the first few years of implementation, and then about $300
million thereafter. Congress directed CMS to promulgate
regulations to implement the modifications in reimbursement
rates.
A perusal of the rulemaking record, including comments from
witnesses before us today, revealed substantial concern that
the new methodology will not provide dispensers of
pharmaceuticals with sufficient revenue to cover the costs of
dispensing drugs under the Medicaid program, nor are these
concerns simply the cry of the economically self-interested.
The Office of Advocacy of the United States Small Business
Administration, the Inspector General of the Department of
Health and Human Services, and the GAO also have noted that the
formula will not allow them to recoup their drug acquisition
costs, much less cover all of the costs associated with filling
Medicaid prescription.
The result of the final rule will have unusually perverse
results--results that could not have been intended by Congress
in legislation entitled ``Deficit Reduction.'' Pharmacies could
reject Medicaid patients, leaving such individuals without
access to drugs. Doctors, recognizing this, will then begin to
require that specific brand-name drugs will be used, thereby
raising the costs of drugs under Medicaid, the opposite result
from what Congress intended.
Entitlement spending needs to be controlled, but it also
must be controlled in a sensible manner that actually achieves
limits on spending. Instead, we have a policy that provides
rational economic actors, the necessity of finding ways around
these limits, that will ultimately not lead to reductions in
entitlement spending.
I am sure that CMS will testify that they are just
implementing the law that Congress wrote, and they have no
discretion to modify the policy to reduce adverse consequences
on small business. That is an argument that CMS has made to
Congress one too many times in the past six years, including
this Committee.
For one, I am tired of hearing that. Even a quick perusal
of the rather dense verbiage of the Medicare and Medicaid
statutes will show that CMS is replete with discretion. But
unlike other federal agencies, the Medicare and Medicaid
statutes are ripe with exemptions from judicial review. It is
about time that CMS rulemaking is subjected to the same
scrutiny applicable to all federal agencies.
I look forward to working with the Chairwoman and other
members of this Committee on ensuring that the provisions of
the Administrative Procedures Act apply with full force and
vigor to CMS. Otherwise, CMS will be back before this Committee
on some other rule blaming Congress while Congress argues that
CMS has discretion to avoid any potential adverse consequences
to health care providers.
I want to thank the witnesses, including Dennis Smith of
CMS, for agreeing to testify on such short notice. While I
understand that the preparation may be a hardship, I think the
efforts of the witnesses will be very helpful to this
Committee's understanding of the final rule and its effects on
small business.
Again, I want to thank you for holding this hearing,
Chairman Velazquez, and I yield back the balance of my time.
ChairwomanVelazquez. Thank you, Mr. Chabot. And now I
recognize Mr. Braley for an opening statement.
Mr.Braley. Thank you, Madam Chairwoman, and thank you for
holding this important hearing. I would like to recognize and
thank one of my constituents, Matt Osterhaus, for taking time
from his busy pharmacy practice to join us today, and I am
looking forward to his testimony, along with the testimony of
all of our witnesses.
I am deeply concerned by the Center for Medicare and
Medicaid Services' proposed changes in the reimbursement
formula for prescription drugs in the Medicaid program. CMS
claims that this new definition of the average manufacturer
price is meant to approximate the prices at which retail
pharmacies purchase generic medications from manufacturers and
wholesalers.
Unfortunately, however, the final rule is flawed and will
result in an AMP that does not reflect the true prices. In
fact, a December 22, 2006, GAO report shows that the proposed
rule on the AMP would reimburse pharmacies as an average of 36
percent below their cost for generic drugs, which account for
63 percent of all prescriptions dispensed in the United States.
I have repeatedly urged CMS to reject this proposal to
classify reimbursements based on the AMP, which would lower
reimbursements paid to pharmacies for generic drug purchases.
In my State of Iowa, it is estimated that pharmacists will
receive an $11.8 million cut in reimbursements in the first
year of implementation alone. This could force many pharmacies
out the Medicaid business, which would reduce access to care
for Medicaid beneficiaries.
In many underserved areas, it could force pharmacies out of
business altogether. Also, by making generic drugs
unprofitable, Medicaid has created an incentive to dispense
more expensive brand-new drugs which are not subject to the new
formula. So, ironically, this new formula which was established
to save money could actually end up increasing costs to both
the state and the Federal Government for prescription drugs.
I have specifically fought for Iowa pharmacies on this
issue, urging CMS to approve a measure that was passed in the
Iowa General Assembly to offset reductions for reimbursements
for generic medications. This plan would increase the pharmacy-
dispensing fee to compensate for any reduction in the drug
product cost reimbursement. However, this provision needs
approval by CMS before taking effect.
Although I am pleased that the State of Iowa has stepped up
to the plate to make sure pharmacies receive appropriate
reimbursements for generic drugs, I think it is extremely
unfortunate that CMS has put my state in this position. I am
concerned that Iowa's increasing its payment to pharmacists
could place budgetary pressure on other important Medicaid
services provided by the State.
I look forward to hearing from our witnesses today, and I
am hopeful we can shed some light on this proposed change to
reimbursements for pharmacies.
Thank you, Madam Chairwoman, and thank you to everyone who
is participating in the hearing today.
ChairwomanVelazquez. Thank you. Our first witness is Mr.
Dennis Smith. He is the Director for the Center for Medicaid
and State Operation, or CMSO. Mr. Smith has been the Director
since July 29, 2001. He is involved in the development and
implementation of national policies governing Medicaid, the
State Children's Health Insurance Program certification, and
the Clinical Laboratories Improvement Act. Previously, he
served as the Director of the Department of Medical Assistance
Services for the Commonwealth of Virginia.
Welcome, sir.
STATEMENT OF MR. DENNIS SMITH, DIRECTOR, CENTER FOR MEDICAID
AND STATE OPERATIONS
Mr.Smith. Thank you, Madam Chairwoman, and other members of
the panel, and I appreciate very much the opportunity to be
with you today, and to talk about the AMP rule, which was--the
final rule was published earlier this month. The regulation
actually takes effect until October 1. But what we also did was
leave open to comment some of the very issues that you have
highlighted this morning about the definition of AMP itself.
One of the issues that we struggled with, frankly, was the
ability to do the type of data analysis that everyone would
want us to do in reference to the GAO study and the IG. And you
will find that many of our responses hinge around the lack of
data that we are able to--that we have to be able to analyze
the full impact of the final rule.
So what we did in using our discretion really was to
continue the comment period which allows them to--allows
everyone then to be able to start having access to the data to
get a firm handle on the impact of the rule.
As Madam Chairwoman referenced, this rule really sort of
originated with the study of the Office of the Inspector
General, that in December of 2004 testified in front of the
House Energy and Commerce Oversight Investigation Committee.
The IG found that what the states used to establish their
Medicaid drug reimbursements generally bear little resemblance
to the prices incurred by the retail pharmacies to purchase
drugs, and, in fact, that the OIG had found in audit reports
that it had estimated that the pharmacists' actual acquisition
costs for brand-name drugs was an average of 21 percent below
average wholesale price, and for generic drugs an average of 65
percent below AWP.
The effect of the difference between the pharmacy invoice
costs and the amount that Medicaid would have paid for those
drugs was about $1.5 billion. For drugs specifically under the
federal upper limit, which is really the focus of the new rule,
the Inspector General estimated that the invoice price for
multiple source drugs with the FULs was 72 percent below AWP.
In another report on the variation between what state drug
prices were being paid, the OIG found that the difference
between the highest and lowest paying states ranged by drug
from 12 percent to 4,073 percent for the 28 drugs that they had
sampled. That really is the backdrop of the report.
The OIG, in helping to inform us about moving from a FULs
that is based on the average wholesale price to the average
manufacturer price compared the 25 most commonly prescribed
drugs that the old FUL, the lowest pharmacy acquisition cost,
compared to that--the old FUL for that drug was as high as
5,232 percent from the lowest acquisition. On the average
acquisition, they were still finding drugs that were 1,400
percent higher than the average acquisition cost.
So I think everyone did come to a reasonable conclusion
that the old federal upper limit truly was flawed as it was
based on the AWP, which was commonly referred to as ``Ain't
What's Paid.'' I think many folks came together to recognize
that a system that is built on more exact pricing would be
better for everyone.
In terms of want to assure the Subcommittee--I am sorry,
assure the Committee on small business that we carefully
reviewed the comments from--assigned by Madam Chairwoman on
December--on February 23 of this year, on the comments that
were provided. I want to assure you also that the
administration very much cares about the impact on small
businesses.
Throughout this process, we have met with the national
representatives of retail pharmacists, we have met with state
representatives of the retail pharmacists, we have met with
pharmacists themselves. We are trying to get the rule to
accurately reflect what was passed by Congress, with also the
recognition that Medicaid in fact was paying a higher price
than other payers were. And being a program for poor people,
that generally Medicaid is getting the best price for the
services that they have purchased on their behalf.
So we have been meeting with the representatives and the
pharmacists themselves. There are a number of things I think
that clearly the GAO report did raise a great deal of concerns
about the rule, and our response was, ``Wait until you actually
see the rule itself.''
We did change--we did propose an outlier policy to in
effect disregard the lowest drugs that perhaps would not be
available to the majority of the purchasers. We had proposed an
outlier policy in the proposed rule. We increased that outlier
proposal in the final rule, so we think that in fact does deal
effectively with the outlier effect, that no one wants to count
the FULs based on those costs that really pharmacists do not
have access to.
We also had--again, on the definition of AMP itself, there
is a balancing between the use of the definition of AMP for
which there has been a definition of AMP that has been used in
the program for many years. And that definition has been used
on the rebate side of the proposal.
I think folks commonly accepted the sort of common sense
approach to use the same definition on both the payment side as
well as the rebate side, which is what we have done. So if you
artificially take more things out of the definition of AMP,
then you are also giving up rebates that are then paid by the
manufacturers back to the Medicaid program. So these are not--
these are tradeoffs that everyone knew that we would have to
take account of.
In terms of the response on the effect of the small
businesses, again, we are very concerned about the 18,000 small
business pharmacies in the United States. In our economic
impact, we estimated--and I believe that it continues to be the
case--that the rule itself would reduce overall pharmacy
revenues by about $800 million in the first year, and that does
reflect about 1 percent of the sales by independent pharmacies
for their prescription sales itself.
The National Community Pharmacist Association indicates
their prescription sales to be $85 billion. That figure I think
is from 2004, so it is more than that today. But, again, their
prescription sales are about $85 billion, so the savings does
represent about 1 percent of prescription drug sales.
Other small businesses are impacted in the rule as well. We
have hospitals that fit the definition of small businesses,
physicians who would fit the definition of small businesses, so
our rule--we did, again, with some acknowledgement that the
data is not complete for us to give as specific impact as what
we would all have liked.
The Committee also asked us in the comments to consider
alternatives to the rule itself. And I did want to share with
the Committee, I think the--again, to bring perhaps a little
bit more clarity to how the federal upper limits are actually
used in the Medicaid program. The federal upper limits, those
are limits in the aggregate to all drugs that are covered by
the FULs, which are about roughly 700 drugs out of the entirety
of all the drugs that are available on the market. So we are
talking about roughly 700 drugs.
The FULs is calculated on all of those drugs together, so
while there might be differences in lower drugs, and there
could be also payments--higher payments, that they in effect
cancel each other out, what we are looking at is the aggregate
amount. The aggregate amount that we--
ChairwomanVelazquez. Mr. Smith, would you try to summarize?
Mr.Smith. Certainly, Mr. Chair.
ChairwomanVelazquez. It has been close to more than seven
minutes already, so--
Mr.Smith. I apologize. The aggregate in the amount is then
what the states themselves, we would pay to reimburse the
states up to that amount. The federal upper limit does not
include expenditures for dispensing fees. The federal upper--so
the states themselves, the federal upper limit rule does not
impact the overall approach to Medicaid reimbursement, which
rules on the states to set their costs for reimbursement.
So the states themselves--and, again, in particular the
states have the authority under current law, and some states do
this already, and they will have it in the future even when the
rule is in effect. So the states can pay independent
pharmacists more than other types of pharmacists. They could
pay their rural pharmacists more than their urban pharmacists.
So there are many different ways that the states are likely
to react, and, in fact, some already have started to adjust to
the rule to assure that their community pharmacists continue to
participate in the Medicaid program and to continue to assure
that our Medicaid beneficiaries have access to the needed
prescription drugs that they need.
Thank you very much.
[The prepared statement of Mr. Smith may be found in the
Appendix on page 45.]
ChairwomanVelazquez. Thank you. Mr. Smith, in the
regulatory flexibility analysis contained in both the proposed
and interim final rule, CMS analyzed the retail pharmacy
industry as a whole and did not quantify the impact on small
independent retail pharmacies. However, the Regulatory
Flexibility Act requires agencies to consider the impact of the
rules on small entities. As such, CMS failed to meet the
obligations under the law by refusing to examine how small
businesses will be affected.
So I ask you why you didn't assess the impact to
independent retail pharmacies separately as required by the
law.
Mr.Smith. Madam Chairwoman, I believe that we did meet the
requirements of the law, and we specifically referred to the
savings that would be attributed to the 18,000 pharmacies that
are considered to be small businesses. So I think we did
address what the law required us to do.
As I also indicated, the data analysis--we can never get
enough data. We always want more data, which again is why we
have provided for additional comment on the rule.
ChairwomanVelazquez. That is what the General Inspector's
Office and the General Accounting Office and Inspector General
of HHS concluded, that you did in fact conduct the impact
analysis on small businesses? You know, sir, you come here, and
let me tell you, people love to talk about standards and
accountability. But the law is clear in terms of the Regulatory
Flexibility Act. The size standard is very clear, and we do not
find that you conducted the type of analysis that is required
by the Regulatory Flexibility Act.
So let me just say this to you: I will encourage you to go
back and do the analysis that it is required by law, because
this Committee is going to be on top of this issue, and we are
going to have you come back to this Committee over and over
again.
Mr.Smith. I am not an expert on the requirements of the
regulatory act itself. I believe in our--
ChairwomanVelazquez. Well, you should have legal counsel,
because it is very clear.
Mr.Smith. I appreciate that very much, Madam Chairwoman. We
did in the final rule specifically refer to the small retail
pharmacies--approximately 18,000--and we specifically addressed
the financial impacts on those pharmacies.
ChairwomanVelazquez. Mr. Smith, recent studies have shown
that the average dispensing fee is less than half of the
national average of actual dispensing costs. Given that
pharmacies may soon be no longer adequately reimbursed for
their acquisition costs, what is the CMS doing to ensure that
states' dispensing fee structures are actually covering costs?
Mr.Smith. I think that this is an area that, again, many in
the industry have--and the states, as well as us, have sort of
recognized, that over time when you look at the--how
prescription drugs are paid for, acquisition costs that--the
payment based on acquisition costs continue to go higher and
higher and higher while dispensing fees actually have been
pretty flat over time.
So the high reimbursement on the acquisition side to some
extent was masking what--the true costs and dispensing fees
were held very level. I think what will happen--and in
discussing with the states from my own experience as Medicaid
Director in a state, from my own experience dealing with our
state legislature in how they react, I think there will be a
reassessment, again, as I said, to assure that there is access
and to make certain that our small business pharmacists
continue to participate in the program.
ChairwomanVelazquez. You are not going--
Mr.Smith. I am sorry.
ChairwomanVelazquez. --that this will--
Mr.Smith. In our own materials, we have pointed out to the
states, again, that the FULs do not include dispensing fees,
and have encouraged them to adjust dispensing fees where they
believe is appropriate.
ChairwomanVelazquez. So you don't feel that this is a way
for the Federal Government to dump costs on the states?
Mr.Smith. I think it is a way of balancing what the true
costs are on the acquisition side. And, as I said, I think
states will adjust on the dispensing side.
ChairwomanVelazquez. Okay. So let me--I hope that you can
help me understand the intent of the Deficit Reduction Act.
That was to cut costs of the Medicaid program, and the law gave
CMS a significant amount of discretion to create the formula
for reimbursement rates for these generic drugs.
However, the final rule creates an incentive to move toward
brand-name drugs. As the average brand-name drugs costs the
government six times of a generic drug, why was the rule
created in such a way that more pharmacies would likely
dispense these expensive drugs?
Mr.Smith. I have had that discussion personally with
representatives of the retail, and I have heard that theory. I
have just really never quite understood it from an economic
standpoint. So I have just--I have just said we would have to
politely disagree.
ChairwomanVelazquez. So are you telling me you are right,
but the General Accounting Office is wrong? The Inspector
General of HHS is wrong? The only one that is right here is
you.
Mr.Smith. I am giving you my opinion, Madam Chairman, of--
ChairwomanVelazquez. Well, this is not a matter of opinion.
This is a matter of analysis.
Mr.Smith. And for our--
ChairwomanVelazquez. Facts.
Mr.Smith. In our analysis, the Office of the Inspector
General said on the acquisition side Medicaid was spending $1.5
billion too much. The rule itself saves about half of that
amount, so there was an adjustment based on what the Inspector
General--they said we were overpaying by 1.5.
ChairwomanVelazquez. Sir, let me ask you--
Mr.Smith. The rule--
ChairwomanVelazquez. --explain to me how a pharmacy is
going to sell drugs when they know that they are going to lose
money on that drug.
Mr.Smith. I think, Madam Chairwoman--
ChairwomanVelazquez. What is the incentive?
Mr.Smith. --they wouldn't do that, by laws of economics.
But I don't think that the final rule--that it will in fact be
the impact. The FULs is not a drug-by-drug limitation. It is a
limitation in the aggregate to what we pay the states.
ChairwomanVelazquez. So will you agree that this may drive
up costs to the Medicaid program for certain use of drugs?
Mr.Smith. I don't agree with that.
ChairwomanVelazquez. You don't agree with that. So the
whole world is wrong.
Mr.Smith. As I said, I have had those discussions, and I
think that it would be a--states also, again--states have
mandatory dispensing--mandatory generic dispensing laws
themselves, etcetera. So I think there is a balance that,
again, I think--what the future lies, no one has perfect
clarity of that. But I think through experience we think that
the final rule will do what it was set out to accomplish.
ChairwomanVelazquez. Let us talk about the cost to the
states. It seems to me that the new rules put a burden on the
states to figure out how to cover acquisition costs by
pharmacists. Does the new rule set any kind of guidance for the
states? What are the states doing to make up for the shortfall?
Mr.Smith. Well, the states themselves, of course, will want
to assure that there is no shortfall. And in terms of the
states, we will be providing the data to the states about what
the AMPs are, not only for the drugs on the FULs but for all
drugs, which in--again, we talk about transparency in health
care. This is transparency in health care.
So I don't think the impact on the states--they want this
data. States have been asking for AMP data, which by law we
were required to maintain in confidence and were not allowed--
ChairwomanVelazquez. Since you are talking here about
transparency, are you giving clear guidance to the states under
this rule?
Mr.Smith. That certainly is my intent, Madam Chairwoman.
And we have had briefings with the states, and, as I said, they
want this AMP data.
ChairwomanVelazquez. Can you talk to us under the
Regulatory Flexibility Act, if you have given or examined any
alternatives to the proposed rule?
Mr.Smith. We did. We talked a great deal about what the
AMP--the definition of AMP, for example, what fits in there.
And as I said earlier, the definition of AMP has been long-
standing in the Medicaid program on the rebate side of the
program. So if--
ChairwomanVelazquez. Okay. Can you mention to me at least
one alternative that will minimize the impact of the rule on
small businesses and small pharmacies?
Mr.Smith. Certainly, our outlier policy that, again, we use
through our discretion, we think is very much a mitigating
effect on the FULs.
ChairwomanVelazquez. In the report, the Inspector General
of HHS concluded that was inadequate.
Mr.Smith. What we also said with the Inspector General was
they also didn't have the benefit of the final rule itself when
they did their analysis, again, which is why we have extended
the comment period so that sort of analysis will be available
before the final rules go into--before the first new FUL goes
into effect.
ChairwomanVelazquez. How would you respond to those who
will be testifying in the second panel that will say that this
rule could cause many small pharmacies to close their doors?
Mr.Smith. I respectfully disagree with that assessment. As
I said, this rule, in the aggregate, represents about 1 percent
of all sales that they make. I also am from a small town. I
very much understand small businesses, and that they are the
backbone of the American economy.
I don't think the states will jeopardize the access of the
Medicaid beneficiaries, and I think that they will continue to
pay overall reimbursement to the pharmacists to make sure they
continue to participate.
ChairwomanVelazquez. I really appreciate you coming here
and saying you understand small businesses, but this is not
about that. This is about impact analysis under the law.
And now I recognize Mr. Chabot.
Mr.Chabot. Thank you, Madam Chair. And let me just note for
the record, as I think everybody knows, members of Congress are
on various committees, and I am also on the Judiciary Committee
and the Foreign Affairs Committee. And we are marking up the
Patent Reform Bill, and we have several important amendments to
the bill, so I am going to, unfortunately, have to leave here
shortly, and some of my colleagues will be filling in as the
ranking member for different parts of the morning. So I want to
thank them for that. I greatly appreciate it. So I just have a
couple of questions.
Mr. Smith, do you concur with the findings of the GAO and
the Office of Advocacy of the United States Small Business
Administration that the reimbursement rate does not recoup the
costs of acquisition of covered pharmaceuticals, much less the
cost of the pharmacies to dispense the drugs?
Mr.Smith. We have disagreed with what GAO--their analysis
in the studies that they have published, again, on the basis
that they didn't--they didn't know what was in the final rule,
and, again, didn't have the--no one has the data, including
GAO, to make their final analysis, again, which is an important
reason as to why we have delayed the effectiveness of the first
new federal upper limit.
Mr.Chabot. Okay. Thank you. So just to be clear, so you do
not concur with that, is that correct?
Mr.Smith. That is correct, yes, sir.
Mr.Chabot. Thank you. Now, next, do you know how Congress
arrived at the 250 percent of average manufacturers' price for
the reimbursement?
Mr.Smith. In the Deficit Reduction Act, the Senate and the
House passed very different types of proposals. What came out
of conference differed between both approaches. Both approaches
were designed to create savings for the Medicaid program. The
final amount, I couldn't speak to how precisely they arrived at
250 percent, but I think that is an important consideration to
bear in mind.
We are talking about two and a half times of what the
lowest acquisition cost is. So that leaves I think a very
significant cushion between the lowest and the upper limit now,
which is two and a half times that.
Mr.Chabot. Thank you. Next, in failing to quantify the
economic impact on small retail pharmacies, what efforts did
CMS undertake to determine what economic data was available?
Mr.Smith. We did look at--again, I assure you we looked at
the data that we have, and we certainly did understand the
impact to be on the pharmacists' side, and the 18,000 small
pharmacists. We, again, consulted with our Office of the
Actuary. We looked hither and yon for as much data as we could
get.
As I said, we did talk with the pharmacy organizations
themselves. I do believe we went looking for as much data as we
possibly could get.
Mr.Chabot. Has CMS considered amending its final regulatory
flexibility to address any inadequacies in the statutory
reimbursement rate?
Mr.Smith. We left some very important parts continued to be
open for comment that, again, the data that everyone would want
to have. With their AMP reporting, under the new rules, then we
will start having that data. So that is why we left it open to
comment between now and the first new federal upper limit.
ChairwomanVelazquez. Mr. Chabot?
Mr.Smith. Certainly, our intent was to be able to have that
sort of data analysis to then determine whether or not we
should make any further changes.
Mr.Chabot. Yes, Madam Chair.
ChairwomanVelazquez. I just would like, before my blood
pressure goes up--
Mr.Chabot. I would yield to the--
ChairwomanVelazquez. --for the record to reflect what you,
in your statement on the final rule, said about the data. We
are on--although it is clear the effects will be small on the
great majority of pharmacies, whether chain or independent, we
are unable to estimate the effects on small pharmacies,
particularly those in low income areas where there are high
concentrations of Medicaid beneficiaries. This is your own
rule.
Mr.Smith. And, Madam Chairman, I think I also said we
realize that we all want more data than what we had at our
disposal.
Mr.Chabot. Madam Chair, I am being called down to the
Judiciary Committee, so I am going to yield back my time.
Mr.Smith. And now I recognize Mr. Shuler.
Mr.Shuler. Madam Chair, thank you. Back to the data, if you
recognize that the backbone and the success of our, you know,
economy depends upon the small businesses, then why didn't you
request and ask for more data?
Mr.Smith. The data has to relate to what the final
definition is. If it doesn't reflect what the final definition
is, then the data continues to be flawed, which is why when a
number of groups and individuals, including the pharmacies
themselves, asked us not to publish data as the law required,
going back to January of this year, their rationale was the
data will be flawed because you don't have a final definition.
We agreed with that, which is why we have not released the
AMPs under the old definition. But we won't have the data until
we have--
Mr.Shuler. Until after the rule?
Mr.Smith. Which is why we have delayed the comment period,
which is why we have delayed the effectiveness.
Mr.Shuler. So will there be a rule on--a judgment on the
final rule after the fact?
Mr.Smith. Yes, sir. That is what an interim final with
comment is, that it allows, then, to make further adjustments
without going through the entire APA process all over again.
Mr.Shuler. So why can't you submit the data from the AMP to
the states? Is it HIPAA, because of HIPAA compliance?
Mr.Smith. We can. But, again, folks have not wanted us to
submit AMP data under the old definition of AMP. The pharmacy
community itself didn't want us to allow that, I believe.
Mr.Shuler. So it is more important to--hey, I mean, there
is nobody that supports the pharmacists more than I--I mean,
both the chains and the small communities. But, I mean, don't
you think it is more important to make sure that we have the
proper data for them, and for the patients as well?
Mr.Smith. Absolutely. And--
Mr.Shuler. So which is more important?
Mr.Smith. I think that what is important is to have
accurate data to balance any other decision makers on the final
rule. I would be very surprised, though--and you can ask the
next panel--I would be very surprised if they told you that
they wanted us to release the old AMPs.
Mr.Shuler. We will ask that.
Madam Chair, I would request that if--
Mr.Smith. We realize that we all want more data on--
Mr.Shuler. Yes, don't you think we should delay the rule
until we have the final data?
Mr.Smith. The rule, in fact, has been delayed to some
extent. And we have delayed different parts of it. As I said,
the law said--had given us a January date to start releasing
publicly data. We believed it was--our concern was that data
would be inaccurate, and that could have a negative impact as
payers start looking at data that would be inaccurate, and then
start making decisions about their own pricing.
We did delay that. We have also delayed the publication of
the new first federal upper limit--would have, could have,
should have gone into effect July 1. That really is now the end
of the year. In between time, now everyone--manufacturers will
then start reporting their data based on the new AMP
definition. Then, that data will be available for analysis to
make a final determination.
Mr.Shuler. Madam Chair, I would request that you would
submit the information on the impact on small business to the
Committee. I know there is--you said there is not a lot, but
the quantifiable evidence and effects on small business, we
would like to receive that information.
Mr.Smith. We did--as I said, we responded to--in the final
rule--
Mr.Shuler. Not just the information from what is in the
final rule, but the entire information that actually impacts
small business.
ChairwomanVelazquez. Without objection.
Mr.Smith. I will do the very best I can to provide whatever
data that we are going to be able to have.
Mr.Shuler. Madam Chair, I yield back.
ChairwomanVelazquez. Thank you. Mr. Buchanan.
Mr.Buchanan. Yes, thank you, Madam Chair. I think the
concern with all of us is I know I have a pharmacist in our
community that is out of business. There is so much pressure
already on a lot of these small retail pharmacists because of
whatever reason--national chains, other issues.
That is why it is concerning all of us up here, because
sometimes it is just that tipping point that one more something
like this put on them puts a lot of them out of business. And I
know right down the street from me we just had one close in the
last six months. I am not saying it is because of this. It
might be part of this, but I am concerned that we are going
to--we are not going to see a lot of retail pharmacists.
I would be interested to see 18,000 retail pharmacists, how
many have--how many there were five years ago and what it is
today. So I think--I don't even know, but I have got to imagine
that trend is coming down.
I guess the big thing is getting back to this when you
looked at the final rule. Did you spend much time working with
the states or anybody--any other entities to get a sense of the
impact on the analysis? Or was this something that you did
yourself or--
Mr.Smith. We did, Mr. Buchanan. We asked data from the
states themselves. We asked manufacturers to verify their data.
We had the benefit of hearing from the community pharmacists
themselves as they came in. States themselves--some states have
said very--may have very little impact on us, because we
already have our own what are called maximum acquisition cost
lists that are below the old FULs.
So the impact will vary by state, comparing their
acquisition cost limitations that they already had in place
versus the new FUL. So we did go looking--we--
Mr.Buchanan. Yes. When you said you had the community
pharmacists come in, how did that work out? I mean, how many
did you have come in over what period of time, and in terms of
doing an analysis?
Mr.Smith. I don't recall how many meetings I have had, but
I--
Mr.Buchanan. Well, what is the reaction?
Mr.Smith. --had several--
Mr.Buchanan. What was the reaction, the feedback you had
from the community?
Mr.Smith. Certainly, the reaction was of concern.
Certainly, the rule was, and the law was, designed to generate
savings. We understand that and know that would be a concern.
Mr.Buchanan. The other question I had, why are brand-name
drugs not part of the modified reimbursement plan? What is the
rationale there?
Mr.Smith. Because to be on the federal upper limit you have
to have a competitor. So the FULs is only to those roughly 700
drugs, not the entire 55,000 drugs. So you have to have a
competitor to be on the FULs in the first place.
Mr.Buchanan. How did they decide on the 700 drugs? Why was
it not 700, 800, what was the--
Mr.Smith. They come on as a generic manufacturer to--as a--
you have a brand-name drug all by itself, and then you have a
generic manufacturer that comes in and is doing the generic
equivalent of that. They go to the FDA, and then FDA says now
there is a generic equivalent, so that is how you get on the
FUL is by having a generic competitor.
Mr.Buchanan. And you touched on this, but what is your view
of the discretion that CMS has in developing the average
manufactured price?
Mr.Smith. I think we--I think the--again, what we did was
to introduce an outlier, a policy in the first place, in the
proposed rule, which we increased in the final rule. We went
from 30 percent to 40 percent. That was in our discretion.
In terms of who is in within the definition of AMP, we
disregarded sales to nursing homes. We disregarded certain
sales that would have had an impact on the AMP. However, if you
swing too much to the other side, and start taking more and
more transactions out of the list, then Medicaid will start
losing rebates from the manufacturers.
Mr.Buchanan. Thank you, Mr. Smith. And I yield back, Madam
Chair.
ChairwomanVelazquez. Thank you. Mr. Braley.
Mr.Braley. Thank you, Madam Chairwoman. Mr. Smith, I was
pleased to hear that you looked hither and yon for as much data
as you could get. Frankly, I have not heard that word used
since the last time I watched the movie Robin Hood.
But I think that one of the things that you are not getting
from this bipartisan panel is that all of us are concerned
about the AMP formula, the criteria you use to define the
formula, and its adverse impact upon the community pharmacists
that we represent.
And I think that attitude on the part of the agency you are
here to represent is reflected in the fact that on May 18,
2007, over 100 of my colleagues, including Ms. Fallin, Mr.
Shuler, myself, in a bipartisan spirit, probably one of the
most bipartisan outreach efforts I have seen since coming to
Congress in January, asked a simple request of Leslie Norwalk,
and that was to recognize the practical reality of the
implementation of this rule when it is going to be applied by
many states whose legislatures are no longer in session.
Your rule comes out on July 1, 2007. My legislature
adjourned in May and won't reconvene until January. And I think
that is the case in many smaller states, and in probably some
of the larger states of this country. And one of the reasons
why we made this outreach effort in a bipartisan fashion was to
address the simple, practical realities of giving states an
adequate opportunity to provide the input and feedback to your
rule after final publication, before implementation.
And from my understanding, rather than acceding to our
request to delay that until December 31, 2007, your agency has
decided to begin the implementation in October. Is that true?
Mr.Smith. If I can take a minute to explain, and the impact
on the states and how, again, this is enforced with the states,
because I think you raise a very important point. The data that
we all want we can't get until you get to a final definition.
We have delayed the effectiveness of the new federal upper
limit. The new federal upper limit itself, in terms of our
relationships with the states, is a calculation that we do--
that we would do in terms of enforcement with the states once a
year. So while the new FUL--the first new FUL will come out
roughly December, we would not be taking any action against a
state roughly for a year after that.
So I think legislatures will come back in time to make any
modifications that they deem to be necessary, before we take
any adverse action against a state.
Mr.Braley. In fact, several of these states, including my
State of Iowa, the State of Kansas, which the original co-
authors of this letter--Jerry Moran and Nancy Boyda--represent,
and the State of Louisiana have plans to revise their
dispensing fee requirements in anticipation of just what we are
talking about. Can you describe how these states are going to
be able to try to bridge a gap that nobody here seems to be
able to understand or define?
Mr.Smith. I think between now and the end of the year we
will start having--we will get the data that everyone is
looking for in time for them to make any adjustments. As you
indicate, states are already, in anticipation of savings on the
acquisition side, re-balancing that to--at least to some extent
with increase in dispensing fees, which I said in my earlier
remarks have really been flat for several years now.
So states have the--all of the authority they need to make
those changes in dispensing fees, and by the time they come in
next year they will have the data before CMS has taken any
enforcement action against them.
Mr.Braley. Have you had the opportunity to review any of
the proposals from the states that are submitting requests?
Mr.Smith. We have, yes, sir.
Mr.Braley. And have you seen anything in any of the
components of those state programs that you believe will be
particularly effective in addressing some of the issues we have
been discussing here today?
Mr.Smith. Well, the states have the authority to set their
reimbursement rates, which generally includes acquisition costs
and dispensing fees. The dispensing fees do need to be
reasonable and are supported by data. The extent to which Iowa
or any other state that comes in and says, ``Look, we need to
increase our dispensing fee, we believe we need to increase our
dispensing fee to our rural pharmacists to assure access,''
then they would have the right to do so. They would submit a
state plan amendment, and we would approve that state plan
amendment.
ChairwomanVelazquez. Ms. Fallin.
Ms.Fallin. Thank you, Madam Chair. Thank you for coming
today to visit with us about a very important issue. We
appreciate you being here. I have a question about legal
authority and about CMS. And what legal authority does CMS have
to delay the statutory deadlines on this rulemaking?
Mr.Smith. The statutory deadlines we take very seriously,
and do our very best to meet them. The statutory definition was
to have an AMP rule by July 1. We were a couple of days late,
but I think any significant delay beyond that then calls into
question whether or not we met our statutory obligation.
Ms.Fallin. Well, if CMS missed that deadline, which you
did--I think it was July 7 by the time it was--received July 6
to register the rule, and then publication in the Federal
Register on July 17--and if we missed those deadlines, I guess
would that mean that we could also play with other statutory
deadlines, too, in other areas?
Mr.Smith. The risk of missing the statutory deadline I
think is an issue for lawyers to kind of debate and that I am
not really the expert to do that.
Ms.Fallin. Okay.
Mr.Smith. Sorry.
Ms.Fallin. That is all right. Thank you.
Thank you, Ms. Chairman.
ChairwomanVelazquez. Mr. Gonzalez.
Mr.Gonzalez. Thank you very much, Madam Chair. And welcome,
Director Smith. Quickly, you know, this is all a result of the
Deficit Reduction Act. When we were debating that--I still
remember that well, because I serve on Energy and Commerce, and
the way I figure it really happened like this, and this is
where we find ourselves today.
The White House said, ``We are going to reduce spending X
amount of dollars.'' Then, it filters down to Congress. And you
look at each Committee that has certain jurisdiction, and they
say, ``You have jurisdiction over these departments or
agencies, and we are going to cut X amount of dollars.''
Whether it is realistic or not, it does not matter. These are
arbitrary, mandatory figures pulled out somewhere, and that is
the genesis of this thing.
And what you are dealing with, of course, is the end
product. So Energy and Commerce comes out, we have got
jurisdiction on Medicaid, and they say, ``We are going to cut
$10 billion.'' We are trying to figure out, how did you get to
that figure? Well, we are not real sure, but we think we need
to cut $10 billion, because in the big picture that is how much
you have to save from your particular program under that
particular agency that comes under the purview of your
Committee.
We debated and debated. The Chairman at that time, Chairman
Barton, a fellow Texan, promised me that less is more when it
comes to Medicaid. So on the Committee we have Mr. Ross from
Arkansas, who has--I think his wife is a pharmacist, and they
own a small community pharmacy. And I wish he was here today,
because he could explain this in a way that no one else can,
because he is intimately acquainted with all of the details of
what it takes to be a pharmacist in today's economy.
So that is where we are today. Now, I hope Mr. Barton is
right that less is more. He promised he would come to my
district to explain this when the impact of the rulemaking--and
I told him that it--you know, I really don't want to be the
second Alamo in San Antonio, Texas.
But, nevertheless, this is where I am getting at. I know
what you have to do with deadlines and such. You are just going
to find these savings, because we mandated that when we passed
that act. And the $10 billion was going to come out of Medicaid
no matter what, at someone's cost.
Now, I am going to tell you, we will hit the physician, the
caregiver, we will hit the pharmacist, but the one that really
suffers, of course, is going to be the patient. But that is
where we are today.
Now, let us just figure out how we can soften this, and
this is all about damage control. My concern is this, and I do
appreciate your testimony--but based on some of the questions
that we have here, the consequences of what we are doing here,
findings of the GAO, which you have to respect--I mean, you can
disagree to a certain extent, but somewhere along the way you
have to figure there has got to be some legitimacy to what they
are finding here.
But the consequences of where you are pushing the
pharmacists, and what is the role of the pharmacist? That is
the other thing. I am going to tell you something, I don't
think there is going to be a member here, Republican or
Democrat, that doesn't appreciate the role of the pharmacist in
our communities. It is a lot easier for the patient to get a
lot of the information from the pharmacist than it is usually
to get it from the doctor--in making the appointment, keeping
the appointment, being seen, and spending any quality time with
the physician.
There is more quality time being spent today by the patient
with the pharmacist. And at our town hall meetings, I can tell
you the stories that are recounted. And we are going to impact
that relationship, I believe, to the neediest patient out
there.
But this is what I am getting at. You have indicated that I
guess there is two parts to this formula--the cost of the drug
itself, but then this dispensing fee, and I am not sure if you
hinted at or you spoke directly to the fact that, are you going
to be able to pass on some of the costs that may be suffered to
reimburse the pharmacist for the cuts they are going to have on
the acquisition as opposed to the dispensing fees?
That really doesn't help any as far as any real savings,
and I want your opinion on, to what extent is that going to
happen? Is it going to be allowed? We have had this experience
in the past with the oncologists in the payment of the drug,
compensating for administering the drugs, and we are in a huge
mess over that. But I just want your take on the consequence on
the dispensing fee side of the equation.
And, secondly, something that the Chairwoman touched on,
are you pushing the pharmacists to be prescribing brand-name
medicines which are going to be more expensive? So I don't know
where all of the savings is at the end of this whole thing. I
understand the charge and the mandate that you received over
there as a result of what we did with the Deficit Reduction
Act, which obviously some of us opposed and such.
But, again, I just want to know the consequences on
dispensing fees and the fact, are you truly going to be pushing
people to utilize more brand-name and, thus, negating what the
generic drug prescription is supposed to be delivering in the
way of savings.
Mr.Smith. Thank you, sir. On the--and pharmacists do get
paid in two components in general--on the acquisition cost, and
that is what the Inspector General--that is sort of where the
ball started rolling. When then Inspector General said you are
paying--Medicaid is paying $1.5 billion too much based on
acquisition cost, them looking at acquisition cost.
Then, the states are also looking at the dispensing fee,
and the other side of the payment--what a state determines
under Medicaid what a provider actually gets paid. So they set
the reimbursement rates to the states, and a state can say--
they have all of the authority to say, ``We need to increase
our dispensing fee. We are concerned about access, particularly
in the rural areas, so we are going to pay our rural
pharmacists more.''
We are particularly concerned about the impact on the
independent pharmacists, so we can--we will pay them more than
what we will pay a chain. So the states still have the
authority to make the adjustments and decisions that they
believe are needed to assure access for our Medicaid
beneficiaries.
Mr.Gonzalez. Doesn't that work against your very savings
goal? I mean, what I am saying is, all right, let us say GAO,
everybody, and probably the individuals who are going to
testify in a few minutes, are correct--that it is not going to
be adequate compensation for the generic drug and such with the
new formula that you have come out now. So can you just push
and make up for some of that shortfall on the dispensing side?
And if you can, and which they will if you can, then where are
the savings?
It is all--I mean, a dollar is a dollar is a dollar. We can
split up the cost between dispensing and the cost of the drug
itself, but at the end of the day, isn't it basically the same
budget, the same amount of money? And the troubles that we have
been experiencing in Texas regarding the state's failure to
really meet its obligation under the Medicaid program, and
making sure that it is available, it is only going to get
worse.
And so I guess I just--I don't see, isn't it the potential
is any perceived savings be gobbled up by some other component?
Mr.Smith. I think that we have accomplished something that
is very important in the rule on the acquisition cost in
itself. Now we will have much better information about what the
true acquisition cost is in itself. So that is an important--
that is an important gain in itself.
The extent to which states then make a determination that
they have to raise a dispensing fee, they will--again, I think
then they will go through the analysis that they very well may
need to increase the dispensing fee, but not the entire amount
to offset the savings that is paying on the acquisition cost
more specifically.
ChairwomanVelazquez. Time has expired.
Mr.Gonzalez. Thank you.
ChairwomanVelazquez. Mr. Smith, I have two more questions.
First, we all know that there was a statutory requirement for
issuing the rule. My question is: was there a statutory
requirement for the implementation of the rule?
Mr.Smith. Well--
ChairwomanVelazquez. Yes or no? Simple answer.
Mr.Smith. I think there is an expectation that we
implement--
ChairwomanVelazquez. No, no, no, no.
Mr.Smith. --the statute.
ChairwomanVelazquez. That is--
Mr.Smith. I am not--
ChairwomanVelazquez. No, I am talking to you about
statutory requirement of implementing the rule. And if there is
not, my question is: would you hold off at that line of
implementation until you have all the data that you admitted
here you don't have? So that, then, you can have a final rule
that accounts for the needs of small pharmacies?
Mr.Smith. I think we were required to issue the
implementation. I am sorry--to issue a final rule, which is
what we did July 1.
ChairwomanVelazquez. Yes, but that is not my question.
Mr.Smith. In terms of the effective date, we have delayed
the effective date by delaying when the first new federal upper
limit will go into effect.
ChairwomanVelazquez. Well, I am not talking about issuing
the rule and the effective date. I am talking to you about the
implementation of the rule.
Mr.Smith. I am sorry. The implementation--the new federal
upper limit is implementation.
ChairwomanVelazquez. Okay. Let me ask you another question
since cost saving is an issue here, right? Can you tell me why
do you think funding was cut for only generic drug
reimbursement and not for brand name drugs?
Mr.Smith. I think this did stem from a realization that
where there is competition between generics and brand names,
that is how you get on a FUL in the first place; that Medicaid
was overpaying and not getting the best price, which is in many
respects an underlying assumption about the Medicaid program
that Medicaid should be getting the best deal for
reimbursements.
ChairwomanVelazquez. So let me ask you a last question now.
Could there have been cost savings if the reimbursement formula
for brand name drugs was altered?
Mr.Smith. Presumably. I mean, Congress could have enacted a
number of different ways to find savings.
ChairwomanVelazquez. So why do you think we did not? You
have been saying all along, ``I think, I think, I think,'' in
the many questions that I have been asking you.
Mr.Smith. I think there was a clear indicator from the
Office of Inspector General that drugs that have competition on
the folds, Medicaid was overspending by a million and a half
dollars.
ChairwomanVelazquez. Ms. Clarke, do you have any questions?
You will be recognized for five minutes.
Ms.Clarke. Thank you very much, Madam Chair.
Madam Chair, why don't you come back to me? I am sorry. I
defer at this time.
ChairwomanVelazquez. Yes. So we are going to finish this
round, and, Mr. Smith, you are going to be excused. Are you
ready? Okay.
Mr.Smith. Thank you, Madam Chair.
A little freshman SNAFU, and I want to thank you and the
Ranking Member for holding this hearing, and it will have an
impact on all of our congressional districts.
On July 6 of 2007, CMS released a final rule on Medicaid
drug pricing that would redefine the average manufacturer's
price, also known as the AMP, and cut Medicaid reimbursements
to pharmacies for generic drugs by $8 billion over the next
five years.
Unfortunately, the final rule remains fundamentally flawed.
It includes a final definition of AMP that could severely
underpay retail community pharmacies if used as a reimbursement
metric. In my community, this is a huge, huge concern.
These reductions could force many pharmacies to close or
reduce hours, jeopardizing Medicaid beneficiaries' access to
retail pharmacies. If payments to pharmacies end up below their
cost for generic drugs, pharmacies could earn a greater margin
by dispensing a higher priced brand medication in Medicaid,
about $150, which is more than seven times higher than the
average payment for generic medication, around $20.
As you know, too, Madam Chair, there are about 8,750
community pharmacies active in our state. Community pharmacies
employ more than 117,000 employees, including over 13,000
employees who work at independent pharmacies. Medicaid is 15.9
percent of the marketplace.
ChairwomanVelazquez. Mr. Smith, I'm very concerned that the
final rule that CMS has promulgated as it relates to how
Medicaid reimburses pharmacies for generic medications will
threaten the ability of low income beneficiaries and seniors in
my district in Brooklyn, New York to access prescription drugs
and services at their local retain pharmacies.
CMS was instructed by Congress and the Deficit Reduction
Act of 2005 to define AMP to accurately reflect retail pharmacy
acquisition costs. However, based on my understanding of the
final rules, CMS chose to completely ignore congressional
intent and has done nothing to help mitigate the unprecedented
level of cuts to community pharmacies.
Do you believe that the final rule that CMS has issued
provides for an accurate benchmark to reimburse pharmacies and
provide an adequate level of reimbursement to pharmacies to
help insure their continued participation in the Medicaid
program?
Mr.Smith. I believe the final rule is a reflection of
payment on the acquisition costs. The acquisition costs for the
drugs on the federal upper limit, that limit would now still be
two and a half times the lowest drug that is available. So on
the acquisition side we do believe that is a margin that is
allowable.
Secondly, it is all drugs on the FUL in the aggregate. So
there is a relationship that this is not a drug by drug. This
is all of the drugs together in the aggregate.
Ms.Clarke. And inherent in that is an unintended
consequence.
Mr.Smith. Well, again, I think we will all have a much
clearer understanding of what actual acquisition costs are,
which I think is a good thing for everyone, and the savings
themselves to the independent pharmacists represents about one
percent of their pharmacy sales.
Ms.Clarke. Mr. Smith, I have been hearing from my
pharmacies that the implementation of the tamper proof
prescription pad requirement mandated by Congress in the
recently enacted Iraq supplemental earlier this year could
cause some difficulties. Pharmacies tell me there may not be
enough pads available for all prescribers at the time of the
October 1st launch, and that pharmacies could be faced with
either turning Medicaid beneficiaries away who show up with
prescriptions written on non-compliant pads or risking a
subsequent denial of reimbursement of prescriptions dispensed
under those circumstances.
Would CMS be willing to delay implementation of the
requirement or to at least phase it in over a period of 180
days beyond the mandated October 1st effective date?
And would CMS be willing to use some discretion in
enforcing the requirement over the first six months?
Mr.Smith. As you are aware, Congress just passed that law
very recently. We are going to do our very best to meet the
effective date, and we are doing our very best to comply with
what Congress told us to do.
We have worked with the pharmacists. We have heard from the
pharmacists. We have heard from the states. The tamper proof, a
number of states have said in many effects we already do this.
So it will have no impact on it.
So this is going to impact pharmacists in those states that
have not already moved to the tamper proof, which the intent
itself is to prevent fraud and abuse in the Medicaid programs.
So the impact is on states that do not already have tamper
proof, and we are working hard with them to find ways that they
can come into compliance.
Ms.Clarke. So you are up here to help mitigate those
circumstances.
Mr.Smith. We will continue to assess the ability to make
that date and adjust.
Ms.Clarke. Accordingly. Thank you.
Thank you very much, Madam Chair, and I will yield back.
ChairwomanVelazquez. Any other member?
Mr. Smith, I will excuse you, but before you leave this
room, again, I just want to reiterate the impact that this is
going to have not only on local pharmacists, but Medicaid
recipients throughout this country, and I will hope that you
will provide more time before implementing the AMP until you
have the data that is required by the Regulatory Flexibility
Act.
If I am one of those pharmacists sitting here in this room,
by the way, I just will ask you. Have you heard of any pending
lawsuit in light of the Regulatory Flexibility Act?
Mr.Smith. I understand that is something that is being
considered.
ChairwomanVelazquez. Okay. Well, with that, you are
excused.
Mr.Smith. Thank you very much.
ChairwomanVelazquez. And I will ask the next panel to come
forward and take your seats, please.
Okay. We are going to proceed with our second panel. Our
first witness is Percy Bellow. Is he here?
Okay. So let's go with Mr. Osterhaus. Mr. Osterhaus is a
community--sorry. And I will recognize Mr. Braley for the
purpose of introducing his constituent.
Mr.Braley. Thank you so much. It is my distinct pleasure to
introduce one of my constituents who is uniquely qualified to
testify here today.
Matt Osterhaus is a community pharmacist and consultant and
co-owner of Osterhaus Pharmacy in Maqueketa, Iowa.
Osterhaus Pharmacy has been a family owned operation since
1965, and Matt is actively involved in community development,
as well as an adjunct faculty member at the University of Iowa
College of Pharmacy, and he has had the great fortune of
practicing with his father, also a community pharmacist who
served in the Iowa legislature and has a great background in
how these Medicaid adjustments impact patients, as well as
community pharmacists.
And we welcome you here today
STATEMENT OF MATTHEW OSTERHAUS, PHARMACIST, OSTERHAUS PHARMACY,
ON BEHALF OF ASSOCIATION OF COMMUNITY PHARMACISTS CONGRESSIONAL
NETWORK
Mr.Osterhaus. Thank you very much, Congressman Braley.
Members of the Small Business Committee, thank you for
allowing me to testify this morning on behalf of the
Association of Community Pharmacists Congressional Network and
the independent pharmacies they represent across the country.
Since the launch of Medicare Part D, the prescription
program in January of 2006, hundreds of pharmacies have closed.
It is my belief and the belief of thousands of pharmacists and
pharmacy owners across the nation that if the economic
environment of pharmacy remains as it is today and CMS
implements average manufacturer's price, or AMP, a reported in
the recent ruling, the citizens in the nation may see an
unprecedented loss of pharmacies, in particular, independent
community pharmacies.
The one-two punch of Medicare Part D along with AMP, the
way that has been thrown out at us really threatens the
survival of the community pharmacy. The loss of these
businesses will potentially impact the access for our citizens,
our patients who depend on pharmacies for their prescription
and health care needs.
I see independent community pharmacy as kind of the classic
example of small business in the United States. We have
survived through a lot of ups and downs for several centuries.
I think we have survived because we do add value along with the
dispensing of medications and the care for our patients.
Many of these businesses serve as the anchor of their small
towns, including Osterhaus Pharmacy who is, I guess the
downtown anchor of Maqueketa, Iowa. We are in a community of
6,000 people. We employ 25 people in our pharmacy, including
seven pharmacists. We provide medication therapy management for
patients with private insurance, with Medicaid, with Medicare
Part D. Approximately 30 percent of my patients have Medicaid
as either their primary or their secondary insurance.
As we face crises over the years, we have come out of
those, but I see none other that has ever been as hard hitting
as the potential AMP legislation. With the creation of Medicare
Part D, the PBMs, or pharmacy benefit managers, began setting
reimbursement on a huge percentage of the prescriptions that we
dispense to our patients.
And there are a lot of small businesses, pharmacies, across
this nation who closed their doors due to the slow and low
reimbursements in this plan. It has been estimated that a third
of our health care dollars are being spent on administration,
benefit management, and frequently not allowing benefits.
I feel we need to reallocate our health care resources and
refocus them on the care of patients. I think we also need to
insist that the providers provide value for the dollars spent.
Independent pharmacy is somewhat unique as a small business
group in that we have very little control over the cost of what
we pay for the medications. There is a limited number of
wholesalers or sources for the prescription drugs, and we have
almost no control over the price that is set that we are paid
for it.
Yet when it comes time to squeeze savings from the system
in this escalating cost environment, both state and federal
government turn to pharmacy as if we had full control.
Now, through CMS and the establishment of AMP, generic
pricing structures is striving to save billions of dollars by
cutting payments on medications to pharmacies across the
country, and many people think that there is a lot of fat to be
cut.
But if we set up the system the way that is certainly out
there right now, if we pay $100 to bring a medication in to our
pharmacy from the wholesaler and Medicaid decides to reimburse
us 85, and then we wait four to six weeks to be paid for it, we
cannot stay in business very long.
Utilizing a formula to establish product reimbursement is
fundamentally flawed. Bringing it in at less than the
acquisition that pay my wholesaler is not a recipe for success.
Utilizing mail order pharmacies and hospital out-patient
pharmacies in the formula I think is a significant flaw, and it
is an inequity that needs your attention today, and I certainly
appreciate the opportunity and the attention you have given it
in this hearing.
I think it is obvious that a small business of any type
cannot survive if the revenue that comes in does not match the
cost of the product being sold and the overhead that we need to
provide quality service to our patients or the consumer.
I submit to you that hundreds of independent pharmacies may
be lost if AMP is implemented as currently designed. This is a
blow to small business, but it is devastating to the patients
served by these small business.
Pharmacists across the country are agonizing over the
thought of not being able to serve their patients, and those
patients will be distraught over the thought of losing their
pharmacies.
People up here maybe on the Hill or people at CMS may think
that there is not an access issue in pharmacy. When I come to
Washington, D.C., I can see four pharmacies on one corner
sometimes, but in Iowa, a prime example of rural America, there
are several counties that only have one pharmacy, and these
patients understand that if they lose that pharmacy it could be
30 to 40 miles to the closest pharmacy.
I think of my own patients. I think of Don who has a
seizure disorder, was totally uncontrolled. Our pharmacists
worked with him to help him adhere to this regimen. He has not
been back in the emergency room or the hospital sense.
I think of Peggy, my patient with multiple sclerosis. We
have collaborated with her physician to better control her
pain, who helped her quit smoking. Community pharmacies care.
Pharmacists care and want to partner with Medicaid to take care
of these patients.
I feel we serve a vital role in our health care system.
These are small businesses that provide entry level health
services to the patient. We need to have a system of
reimbursement that is fair so that we can continue to be in
business. The average number of employees in an independent
pharmacy is 12, but they all expect to receive their paychecks
every week, and we expect to be able to give them a decent
living.
There are a lot of ways that pharmacists could help save
health care dollars.
Am I pushing my time?
ChairwomanVelazquez. Mr. Osterhaus, we have five minutes
and it is up, but I will give you an extra minute so that you
could summarize.
Mr.Osterhaus. Thank you.
The Iowa Medicaid pharmaceutical case management project is
working to provide extra value to the patients of Iowa that are
covered under Medicaid. Pharmacists want to partner with
Medicaid to take good care of these patients.
I would ask you to direct CMS to rework the formula for AMP
and to delay implementation until states can establish an
equitable fee for the services we provide. We can increase the
value and increase the quality of care given to these patients,
but we need to work on it together.
Thank you again for the opportunity to testify today.
[The prepared statement of Mr. Osterhaus may be found in
the Appendix on page 49.]
ChairwomanVelazquez. Thank you, sir.
Our next witness is Anthony Civello, Chairman, President
and Chief Executive Officer of Kerr Drug, Inc., in Raleigh,
North Carolina. He is testifying on behalf of the National
Association of Chain Drug Stores. Mr. Civello is the Chairman
of the NACDS Board of Directors. He has served on this
institution sine 1998.
Welcome, sir, and you will have five minutes to make your
presentation.
STATEMENT OF ANTHONY CIVELLO ON BEHALF OF THE NATIONAL
ASSOCIATION OF CHAIN DRUG STORES
Mr.Civello. Thank you very much, Madam Chair, and members
of the Committee. I thank you for your interest, and I thank
you for your understanding.
As you said, I am a CEO of a chain of drugstores. There are
102 drugstores. They are all based in North and South Carolina.
Sixty-five percent of these stores, however, are in rural North
Carolina. So we service many Medicaid patients.
I would like to ask the Committee if you mind if I do not
use my prepared notes and I maybe just refer to some of the
comments that Mr. Smith made earlier on. And I, quite frankly,
as amazed that Mr. Smith feels he is an expert on community
pharmacy economics. He made a joke about AWP, ain't what paid.
We call AMP ain't my price because it does not reflect what we
are paying.
Also, the comments about independent pharmacies or chain
pharmacies will lose one percent of their sales based on the
implementation of AMP, and that is categorically wrong. Our
rural stores particularly fill up to 50 percent of their total
prescriptions in Medicaid prescriptions. Our Durham County
stores fill 30 to 40 percent of their prescription. Sixty-one
percent of all of our prescriptions are generic.
The OIG and the GAO has said that AMP will equal 36 percent
below our cost. I cannot see how he gets the math to work to
state that one percent will be affected, and I take offense to
that.
First of all, NACDS has worked with Grant Thornton and our
Coalition for Community Pharmacy, and we have done a nationwide
study on the cost to fill prescriptions. We did it with 23,000
pharmacists participating, and we used over 832 million
prescriptions. We accounted for all costs, and it cost $10.50
on average to fill a prescription. This flat out will not work
with an AMP that is 36 percent below our cost.
The comment was made that there was a comment period. Well,
I'd like to reflect on that a minute. That is, for the last two
years we have provided comments. I believe the comments have
been heard but not listened to.
We have provided data indicating that the AMP as being
described in the role, in the projected role, at the time by
CMS was flawed and inaccurate, but again, it fell on deaf ears.
The bottom line is just very simple, and I repeat what Mr.
Osterhaus said at the outset. The bottom line is this is going
to be very damaging to community pharmacy. I have been in the
business for 40 years as a pharmacist, and I do not only
represent the chain drug industry today. I represent also all
of pharmacy as a pharmacist.
And I can tell you that we have not faced the situation
like this in my history. It is very damaging and will be very
damaging. That is the bottom line.
The comment was made that this will not serve as a
disincentive to generics. That is patently incorrect. This will
be a disincentive for generics. The fact is across our nation
generic utilization varies from a low of 45 percent in New
Jersey to a high of over 60 percent in the State of Washington.
There is a lot of room for savings by increasing utilization in
generics.
This AMP role will decrease that incentive. It will, in
fact, incentivize brands. The comment was made earlier that
brands cost six times more. That is fact. That I agree with.
It will do something else for brands that you should be
aware of, and I believe you are. It will lower rebates. The
lower the AMP, the lower the rebates. So we will have increased
utilization of brands and less rebates. I just cannot make the
math work and to accept any of Mr. Smith's remarks.
There are solutions. Quite frankly, we have approached the
administration on many occasions and again fallen on deaf ears.
We need action now. As an industry I call upon you for all of
community pharmacy to act now.
We need legislation. The implementation is upon us. It will
be here by year end. We have got to act now. We need
legislation. There are a number of things that we could bring
to the table. We need people that will listen to us. Every day
we negotiate with our state legislators, and the comment was
made we are not dumping on our states. We are. We are, in fact,
dumping on our states.
And our states are trying because we are a part of that
business. We are members of the community, and they are
reacting by trying to increase the dispensing fees. But this is
clearly dumping.
Let me just give you a couple, if I could take 30 seconds
here, a couple of areas that I would suggest the Congress
address. Clarify the definition of AMP and include only sales
to wholesalers for drugs distributed.
Quite frankly, just make it be the price we pay. It is that
simple. Do not publish a list that is below our cost.
Establish federal payment limits on drugs with as little as
two sources of supply. We need you to go back to the pre-DRA,
which is three sources of supply versus the two that the AMP
ruling has in it right now.
I will conclude by saying, again, I appreciate your
listening. I stand ready to answer any questions today and in
the future as it relates to this dire situation.
Thank you.
[The prepared statement of Mr. Civello may be found in the
Appendix on page 55.]
ChairwomanVelazquez. Thank you, Mr. Civello.
Our next witness is Mr. Charlie Sewell. He is the Senior
Vice President of Government Affairs at the National Community
Pharmacists Association. The National Community Pharmacy
Association represents 24,000 independent pharmacies and 50,000
community pharmacists and their patients across the country.
Prior to joining NCPA, Mr. Sewell was President of ACG
Enterprises.
Welcome, sir, and you will have five minutes for your
presentation.
STATEMENT OF CHARLIE SEWELL ON BEHALF OF NATIONAL COMMUNITY
PHARMACISTS ASSOCIATION
Mr.Sewell. Thank you, Madam Chair and Committee members.
We really appreciate the opportunity today to talk about
our concerns with the AMP rule.
You mentioned that we represented 24,000. We used to
represent 24,000. Today unfortunately we only represent a
little over 23,000. Frankly, community pharmacy was doing very
well for the last five years, until a year ago. We were holding
steady in terms of our number of pharmacies.
In fact, we were showing a little bit of growth, and now
what has happened in the last year, we had an intervening
variable, Medicare Part D. In the last year we have lost 1,152
pharmacies across the nation. That is five percent of
independent pharmacy. We certainly have been staggered with the
low and slow reimbursements associated with Medicare Part D,
but we are still trying to do the best for out patients.
Unfortunately, we are looking at a situation now with the
Medicaid proposal that is now in the final rule where we are
going to be knocked to the canvas and knocked to the canvas
hard, and we are going to find it very difficult to get up.
We have ten percent of our pharmacies, over 2,300
pharmacies across the country. Over 50 percent of their
business is Medicaid. If they are going to be reimbursed at 36
percent below their cost and with the minuscule state
dispensing fees as they are now, there is now way they are
going to be able to stay in business.
You know, CMS talk about having a further comment period.
That further comment period is going to be way too late for a
lot of these pharmacies because they are going to start going
out of business almost overnight.
Congressman Gonzalez mentioned that it is all about quality
time with our pharmacists. We do spend an extraordinary amount
of time with our patients. It is because of our pharmacists
that patients day in and day out avoid adverse drug
interactions. It is because of our pharmacists that patients
take their much needed medicines on time and properly.
When that relationship is done away with, and that is what
is going to happen, Medicaid patients are going to suffer, but
also patients across the board are going to suffer, as has been
mentioned by Mr. Braley. We have a lot of pharmacies. We have a
lot of pharmacies. We are the only pharmacy within 30, 40
miles. If we are not there, there is nobody to go to for their
medical needs. The pharmacist is really the front line to
defense.
Uncle Sam unfortunately has become our business partner.
That was not our choice. Now about 50 percent of the average
independents' pharmacy, their business is government, either
Medicaid, Medicare or Tri-Care.
And what we have discovered is Uncle Sam is a lousy
business partner. He does not do a very good job, and now we
have been handed the average manufacturer's price. Now, we knew
it was going to be bad. We just did not know how bad it was.
When Congress voted on this measure in the Deficit
Reduction Act, they had no numbers. They had no AMP data
because the AMP data was always confidential information that
was reported between the manufacturer and CMS. We asked CMS to
release data to us on a confidential basis so we could respond
with their specific concerns and show them exactly what this
impact was going to be. They failed to provide us that data.
I mean, they say that we did not want it published. Of
course we did not want inaccurate data published. It would be
misleading, but we wanted the data so that we could show them
the net effect. Unfortunately, we were not able to do that. So
the only data that is out there is what GAO and OIG have, and
they have shown exactly, exactly the same results when you look
at GAO they say they are going to be reimbursed at 36 percent
below our cost for 59 of the 70-some total drugs that they
looked at. They actually looked at 77 drugs which represented
over 50 percent of the marketplace in Medicaid. On average we
are going to be reimbursed at 36 percent below our cost.
OIG looked at the top 25 high expenditure drugs in the
Medicaid program. They said that for 19 of the 25 we would be
reimbursed below our costs, and then if you look at the five
out of the other six and you factor in our cost to dispense
that Mr. Civello related, you are looking at a situation where
we are going to lose money on those drugs as well because they
are not going to come close to covering the 1050 that it costs
to run your pharmacy. That is what it costs to run the
pharmacy, to pay for the pharmacist, to pay for the rent or the
mortgage, to keep the utilities paid for. I mean, that is
simply the operation of a pharmacy, and if you don't cover the
cost of the drug and what it costs to actually operate the
pharmacy, you can't stay in business.
I mean, you hope you also eke out a meager profit. That is
certainly not being allowed by this rule.
CMS made a number of sweeping generalizations in the rule,
and you heard some of those today from Mr. Smith. They
essentially reject out of hand OIG and GAO. Yet they have never
provided any specific reputation to either of those studies.
They just say they disagree with them.
CMS suggests that the shortfall can be made up by
increasing dispensing fees a the state level. Talk about an
unfunded mandate, that is an unfunded mandate to the states
given their budgetary pressure.
And what we find of interest is they are really talking out
of both sides of their mouth. There was an increased dispensing
fee. It was just offered up by Louisiana, and their plan? Guess
what. CMS rejected it. So they say they are going to allow the
states to increase the dispensing fees. In fact, the first
opportunity they had they rejected the plan that was put
forward by the State of Louisiana out of hand.
They go on to say in the rule that there is a significant
impact. They did not address that impact at all. They shirked
their responsibilities with regard to the Regulatory
Flexibility Act. I mean, there has been no analysis whatsoever
of the 18,000 pharmacies all whom we represent and what kind of
impact this is going to be.
We are looking at it and saying it is going to wipe out
almost our entire net profits. Any business that does not make
a profit does not stay in business.
With that, Madam Chair, I would be glad to answer any
questions at the appropriate time.
Thank you very much.
[The prepared statement of Mr. Sewell may be found in the
Appendix on page 61.]
ChairwomanVelazquez. Thank you, Mr. Sewell.
Our next witness is Mr. Ed Hagan. He is the Director of
Pharmacy at the Associated Food Store in Salt Lake City, Utah.
He is testifying on behalf of the Food Marketing Institute,
which has member companies with retail pharmacists. The Food
Marketing Institute conducts programs in research, education,
industry relations, and public affairs on behalf of its 1,500
members.
Prior to joining Associated Food Store, Mr. Hagan was the
Director, Pharmacy at Woodtry Food and Drugs.
Welcome.
STATEMENT OF ED HAGAN, ON BEHALF OF FOOD MARKETING INSTITUTE
Mr.Hagan. Good morning, Chairman Velazquez and members of
the Committee.
I very much appreciate this opportunity to testify before
the Committee about an issue of significant importance to all
of its supermarket pharmacies, particularly those that are
small businesses and the Medicaid beneficiaries that we serve.
FMI is extremely concerned about basing reimbursement for
prescription priced drugs on the artificial concept of AMP. We
believe that this use of AMP in the way it has been implemented
by CMS will cause severe hardships for pharmacies and Medicaid
recipients alike.
Associated Foods is a member owned cooperative based in
Salt Lake City, Utah. In addition to the independent stores we
serve, we own 21 stores and with three other wholesalers co-own
the Western Family private label. Seventy-five of our stores
across eight states and Guam have pharmacy operations. These
pharmacies range in size from some locations filling as few as
70 prescriptions a day to larger that fill between four and
500.
While some of our stores are located in large metropolitan
areas, Associated Foods also includes stores with pharmacies in
small towns, such as Twin Bridges, Montana, Kamas, Utah, and
Raymond, Washington. Many of our stores in these small towns
represent the only pharmacies available.
Medicaid represents a little over ten percent of our
business overall, but this figure jumps to more than 15 percent
in many of our rural areas. Our generic percentage, currently
is 61 percent of our prescriptions are filled with generic
drugs.
Pharmacy profit margins, particularly in the case of small
supermarket pharmacies, are a small percentage of total store
revenues and a far lower percentage than most other pharmacy
retail businesses. The gross margin for associated food store
pharmacy operations is in the range of 20 percent with net
profits lower than two percent.
A recent GAO study on this issue suggests that many
pharmacies will lose money when AMP based FULs are implemented.
Because pharmacy margins are razor thin, many pharmacies will
not be able to sustain such losses and will either have to
leave the program or go out of business.
Most of the associated food stores with pharmacies are
single store owned operations. These stores generally encounter
the same per store expenses of the stores of larger chains, the
same salaries for pharmacists, same liability and other
insurance requirements, the same operating costs, but without
the ability to minimize the losses imposed by AMP policies
through economies of scale and better purchasing power of
larger chains.
The opinion on how the states and various private payers
react to the implementation of AMP as a benchmark: my rough
estimate is that this policy has the potential to decrease
pharmacy margins by five to seven percentage points, which
would cause many of the small stores represented by Associated
Foods to lose money.
Even if the damage is solely limited to Medicaid, this
would be a devastating cut for retail pharmacy and could result
in the failure of some of our small business members.
Facing these cuts, Associated Foods' pharmacies and other
FMI may find it extremely difficult to serve Medicaid patients.
This issue will only be compounded as states such as California
seek to move to an AMP based payment for all prescription drugs
that are not subject to the FUL and as other payers turn to AMP
for their own purposes.
Complicating the AMP problem is the fact that dispensing
fees do not begin to cover the costs we incur when dispensing a
Medicaid or, for that matter, any other prescription. By
dictating that CMS use AMP for both the Medicaid rebate program
and FUL for multiple source drugs, the Deficit Reduction Act
left the agency with an almost impossible balancing act.
We believe that CMS failed to adequate use its discretion
to mitigate the severity of the problem. Our industry believes
that the competing roles of AMP as currently defined can really
never be successfully reconciled.
To reconcile the AMP problem, we believe Congress needs to
act in creating a separate benchmark for pharmacy
reimbursement, separate from the calculations needed for
Medicaid rebates. The use of this new benchmark would remove
the need for some of the contortions CMS undertook in its
proposed rule to balance the needs of pharmacies and drug
manufacturers, and it would allow for a clear and accurate
reimbursement metric without interfering with the Medicaid
rebate program.
While we believe that a division of the two sets of
responsibilities currently assigned to AMP is most appropriate,
if Congress decides not to undertake a change of this
magnitude, Congress should at least take steps to mitigate the
negative effect of the AMP policy on retail pharmacies. These
steps can include a more accurate definition of the retail
pharmacy class of trade that excludes from AMP rebates and
discounts that simply are not available to us at retail
pharmacy.
This definition should exclude all mail order pricing,
including PBM discounts to mail order, and all other entities
such as hospitals and nursing homes that are not typical retail
pharmacy.
In conclusion, I appreciate the opportunity to testify on
this important health care issue on behalf of the FMI members
who operate in store pharmacies in their supermarket. We are
hopeful that the House Small Business Committee and the
Congress will act to address the potentially devastating cuts
that retail pharmacy is now facing as a result of the changes
to the Medicaid prescription reimbursement policies.
I will be happy to answer any questions the Committee may
have.
[The prepared statement of Mr. Hagan may be found in the
Appendix on page 69.]
ChairwomanVelazquez. Thank you, Mr. Hagan.
Mr. Sewell, I would like to address my first question to
you. I understand that independent community pharmacists get 92
percent of the revenue from prescription drug sales and tend to
serve a higher proportion of Medicaid beneficiaries than all of
the retail pharmacies. My question to you is with many
community pharmacists working only within two or three percent
profit margins, what will be the consequences if this new
formula is implemented?
Mr.Sewell. The average community pharmacies' net profit is
under three percent right now, and when you translate that to
dollars, it is about $128,000 is all you are able to eke out in
the way of profit for a year.
We are looking at a situation where almost all of that is
going to disappear under this rule. You know, we deliver
Medicaid services to such a higher percentage of Medicaid
patients, and while the national average is about eight
percent, we really are delivering right now about 16 percent in
terms of our average store. That is how many Medicaid patients
we are dealing with, 16 percent of our total business.
So a disproportionate amount of the cuts are going to fall
on our shoulders, and we are going to be first in line to go
out of business. We are already going out of business because
of Part D, and now we are going to see this added to that let
of lows.
ChairwomanVelazquez. Ms. Civello, given the numerous
challenges with producing a stable and accurate AMP, what
alternative benchmarks do you feel would be better suited for
calculating Medicaid reimbursement fees?
Mr.Civello. And I am very happy to answer that. I would
like to reflect on the question you asked Mr. Sewell first.
ChairwomanVelazquez. Sure.
Mr.Civello. And clearly state that the National Association
of Chain Drug Stores, the majority of our members have less
than 50 stores. So there is much serious concern on our
members' parts because we are all part of community pharmacy.
In fact, the 92 percent number you mentioned at Kerr Drug
is 85 percent. So we're like a bit independent. The average for
al of NACDS is over 70 percent. It's a serious issue for all of
community pharmacy.
In regard to your question what benchmark, you know, very
clearly what we as an industry are prepared to step to the
plate to do is accept reimbursement for the product cost that
equates to what we pay. Now, there are a number of formulas
that can be used. There's a number of terms. WAC is a term, but
I don't think we should talk just about what might replace AMP.
I think we need to talk about the fact that AMP is flawed and
does not represent what we pay for the product. The industry,
community pharmacy, is prepared to accept reimbursement at what
we pay for the product.
ChairwomanVelazquez. Thank you.
Mr. Hagan, FMI estimates that supermarket pharmacies
account for roughly 14 percent of all out-patient prescription
drugs dispensed in the United States. It is anticipated that
the percentage will increase over the next few years.
How will the implementation of this rule impact small
businesses in the supermarket industry?
Mr.Hagan. One of the things that I noted when doing the
research for this testimony is, like I stated, that in our
rural areas we have much higher percent of Medicaid
prescriptions. In our rural areas we also tend to have lower
prescription volumes than, say, our metro Seattle, metro Salt
Lake stores, but yet we have the same fixed costs. So our labor
percentage tends to run quite a bit higher in a rural area, and
those are the people that are going to lose money, close the
doors, or stop accepting first.
And so the more that grows in the rural area, the faster
that they are going to make some real decisions.
ChairwomanVelazquez. Okay. Mr. Osterhaus, I really am
interested in hearing directly from independent retail
pharmacists. I want to ask you two questions. First, how will
the new reimbursement formula impact your business?
And, two, do you think that you will be able to continue to
participate in the Medicaid program if the new formula is
implemented?
Mr.Osterhaus. Well, I do not think there is any question
that implemented the way it is now, we would have to make a
serious decision about what we can do to stay in business. As I
said, 30 percent of our patients have either Medicaid as a
primary insurer or secondary insurer. So it affects a lot that
we do every day.
We are from a poor county, and it is just the way it is. I
think the impact would be significant. I do not think that in
my case in a town the size that I live in that I could really
stay in business and not take care of Medicaid patients. I
think in my heart these are the patients who need us more than
anybody else, and I could not stay in business and turn people
away.
I mean, we are the only independent pharmacy in Maqueketa.
So they would have no place else to go to see a pharmacist who
takes the time to counsel them, to identify problems and solve
problems.
ChairwomanVelazquez. Thank you.
I will now recognize Mr. Shuler.
Mr.Shuler. Madam Chair, thank you.
And to the gentlemen, thank you for your testimony and,
more importantly, thank you for your commitment to communities.
Far too often I think we forget how much work and dedication
our pharma system, what they mean to our community. I mean just
in your testimony you talk about how many people really and
truly, they have their doctors, but they certainly lean on
their pharmacists a great deal on all of their problems and
issues, and far too often we don't tell you thanks enough, and
so thank you for the pharmacists.
And to Kerr Drugs, living in Bryson City, growing up there,
obviously Kerr Drugs was our pharmacist, and that was the only
pharmacist we've had for quite some time, and so you've really
been a staple in our community. I commend you not only for the
work that you do in the pharmacist, but sponsoring Little
League programs and stuff like that, I think it goes a long
way, and so I commend you and thank you.
You know, Mr. Osterhaus has talked about how it is going to
impact him, but from FMI, how will it affect you on the
reimbursement side?
And maybe some of the others of you, how is the
reimbursement? Is it six weeks with you? Maybe having a little
more leverage with the larger, more franchises. How is it
impacting you?
Because that has to be a tremendous amount. I mean, my
local pharmacy, we spoke about this particular issue. He was to
the point that not only was he banking with one bank, but he
was banking with three just because of lines of credits to be
able to run and operate his business.
Mr.Hagan. That is a very accurate observation, and I
believe the lag time between filling a prescription and when
you are reimbursed does vary between a number of insurers, but
very accurate to say four to six weeks after you fill a
prescription you will get the check.
So there again it is the more business you do, the more
exposure you have and we find that to be just exactly the same.
Mr.Sewell. If I might add, we have just done a study of all
of independent pharmacy and sine the advent of Part D, we have
now had to take out a credit line on average of $70,000, but
for many of our pharmacies, it is in the hundreds of thousands
of dollars. We are banking the program while the Part D plans,
the PBMs are getting paid up front and sitting on that money
because they have a vested interest in doing so, so that they
can make interest on the float.
That does not make any sense.
Mr.Shuler. Mr. Civello.
Mr.Civello. Thank you, and thanks for your comment about
Kerr Drug in Bryson City. I appreciate that.
I think you need to understand what the days outstanding
were with Medicaid prior to the dual eligibles went from
Medicaid to Medicare, and it was anywhere between ten and 14
days.
When you take that ten and 14 days and more than double it
to 30-plus days, it is a big number whether you are one or
whether you are 100 stores. To Kerr Drug, we already have a
credit line. There is $5 million more on that credit line
because of that delay. It is significant dollars. It is costing
our industry a lot of money, and it is not right because the
government still pays in a timely fashion, seven to ten days.
Where is the money for the other 20 days?
Mr.Shuler. It is being floated, I guess.
[Laughter.]
Mr.Shuler. Well, thank you all for your testimony, and once
again, on behalf of the Committee, thank your pharmacists and
your staff for the hard work and dedication they do for our
people.
I yield back.
ChairwomanVelazquez. Thank you.
Mr. Braley.
Mr.Braley. Mr. Shuler and I share the distinction of both
having under performed in the recent congressional baseball
game we claimed due to injuries we received before the game,
but his comment about Little League baseball sponsorship took
me back 40 years to Brooklyn, Iowa when Crosson's Rexall Drug
had their name on the back of Little League baseball uniforms
when I was growing up in a town of 1,500, and I think that type
of story is what we really need to be talking about because we
run the risk of losing the valuable role that many pharmacists
play not just in taking care of patients, but in the role they
play in making their communities a wonderful place to live and
work.
And, Mr. Civello, you made the comment that your comments
have been heard but not understood, and that they have fallen
on deaf ears. Well, I invite you to join the club.
[Laughter.]
Mr.Braley. On February 16th of 2007, I was proud to send a
letter to Administrator Norwalk, along with 70 other members of
Congress, asking on behalf of Medicaid beneficiaries and retail
pharmacies in our districts and writing to express our deep
concern about CMS' proposed changes in the payment for
prescription drugs in the Medicaid program and concluding with
the request that the proposed payment formula would be
devastating to many retail community pharmacies, Medicaid
beneficiaries.
And in response to that we got a classic nonresponse from
the Administrator, and I received this copy on April 12th of
2007, and it gives you some sense of our frustration in dealing
with the same issues you're talking about.
``Dear Mr. Braley:
``Thank you for your letter on behalf of your constituents
regarding the definition of average manufacturing price.''
And then it goes on to recite what that means, and it
concludes by saying, ``A summary of the comments and our
responses will be included in the final rule which we expect to
publish by July 1st, 2007. I appreciate you sharing your
comments. I will also provide this response to the co-signers
of your letter.''
The letter itself did nothing to address the concerns
raised by 70 members of Congress. So if you think you are
frustrated, join the party.
I talked to you about the letter that 109 members of
Congress signed as a response to this letter on May 18th of
2007. My staff and I have not received any response to that
letter, despite the pending date of the release of the final
rule.
And then on July 11 of 2007, I wrote to the Administrator
after the final rule is released asking for clarification about
how the proposed Iowa plan that I mentioned was going to be
impacted by all of this we are talking about.
So we share your frustration, and we want to work with you
because I can tell you based upon 109 signatures across the
board on a bipartisan basis, people understand your concerns
and we need to do more to help you.
I want to start, Mr. Osterhaus, by asking you this
question. We have talked a lot about the adverse impact on
rural communities. Over ten percent of Iowa's 1,066 pharmacies
are in rural areas and are operated independently, and I assume
your pharmacy fits both of those bills.
Mr.Osterhaus. Yes.
Mr.Braley. Can you tell us what in your opinion CMS should
do to insure that access to drug care in rural communities is
not jeopardized by this new reimbursement rule?
Mr.Osterhaus. Well, I think my comments would stand that we
need to have a fair reimbursement policy, and I think that as
Mr. Mr. Civello said, I think pharmacy is ready to be
transparent on the product cost side. But it is a two-headed
animal. The fee has got to take care of the cost of what it
takes to be in business. If we want to have community
pharmacists on the ground being partners in this program to
make the program both successful and efficient and of high
quality, we need to have fair reimbursement.
How they come about getting what really is acquisition
price is one thing, but shoveling off to the states to let them
decide what they are going to pay for a fee really splits this
into two pieces that I think we are just looking for another
problem.
So I would certainly say that Mr. Hagan's comment about
taking a total different look at AMP with not bringing it into
the rebate picture, which is a whole other rat's nest that
probably should not be part of our health care system to begin
with, I think maybe makes some sense. But if we're going to
utilize what we call acquisition cost, it needs to be accurate,
and if the only thing we have to go on is the GAO report, which
says that did not happen.
Mr.Braley. Madam Chairwoman, I see that my time has
expired, but I just want to make this closing observation and
join in Mr. Shuler's comments about the tremendous benefit that
we receive from the pharmacists and pharmacy employees that you
all represent.
When I was running for Congress, I spent a lot of time in
December of '05 and January and February of 2006 touring
community pharmacies in my district, and I saw dedicated,
committed individuals who were spending inordinate amounts of
time, up to 80, 100 hours a week, trying to make sure that the
patients they served got the best information about the
difficult choices they were being faced under Medicare D.
I want to applaud everyone that you represent and please
take back our best wishes and our thanks for the valuable
service they provide and under very difficult circumstances.
ChairwomanVelazquez. Thank you, Mr. Braley.
And now I recognize Ms. Clarke.
Ms.Clarke. Thank you, Madam Chair.
I just want to commend you and the Committee for really
highlighting this issue. I want to thank our panelists for
really bring to us in real time, you know, the absolute impact
of this rule.
Let me just say that I think it is imperative that we
address this. This is a crisis upon a crisis upon a crisis not
only for the delivery of pharmaceuticals in our communities. I
think about the public health implications of it because we in
the government have now put a huge obstacle in the way of our
community's receiving quality medications that are required to
contain certain types of public health diseases and illnesses
in addition to the wellness factor for our communities. It just
compounds what we know is the challenge for most communities,
be they rural or urban like mine.
And so I want to thank you once again. The remedies, I
think, are well spelled out in these gentlemen's testimony here
today, and I do not want to reiterate them. I want to thank you
for being on the forefront and really driving home for us this
impending crisis.
And, Madam Chair, once again thank you and thank you to my
colleagues as well.
ChairwomanVelazquez. Thank you.
Any other member wishing to make any other questions?
No. Okay. So I want to thank all of you for coming here
today. This we understand is an important issue, and you know,
sometimes all of these federal agencies come here, they issue
regulations, and then when we ask them if they consider other
alternatives, well, you know, they put the blame on Congress.
I want to say this. I know that this Committee does not
have jurisdiction over this issue, but we do have jurisdiction
over the Regulatory Flexibility Act, and we will continue to
press upon CMS to refrain from implementing this rule until
they have all the facts, all the data, and they really conduct
an impact analysis on the adverse effect of this rule on small
and community pharmacists.
So with that I will ask unanimous consent that members have
five legislative days to submit a statement for the record.
Without objection, so ordered.
And this hearing is now adjourned.
[Whereupon, at 12:12 p.m., the Committee was adjourned.]