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

    THE MEDICARE DRUG BENEFIT: ARE PRIVATE INSURERS GETTING GOOD DISCOUNTS
                               FOR THE TAXPAYER?

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

                                    HEARING

                                   before the

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 24, 2008

                                   __________

                               Serial No. 110-213

                                   __________

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

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

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                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

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

                          Phil Barnett, Staff Director
                           Earley Green, Chief Clerk
                   Lawrence Halloran, Minority Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on July 24, 2008....................................     1
    Statement of:
        Merritt, Mark, president and chief executive officer,
          Pharmaceutical Care Management Association; Rick Smith,
          senior vice president for policy, Pharmaceutical Research
          and Manufacturers Association [PhRMA]; Paul Precht,
          director of policy and communications, Medicare Rights
          Center; and Judith Stein, executive director, Center for
          Medicare Advocacy..........................................   112
            Merritt, Mark............................................   112
            Precht, Paul.............................................   139
            Smith, Rick..............................................   128
            Stein, Judith............................................   155
        Schondelmeyer, Dr. Stephen, Pharm.D., Ph.D., professor and
          head, Department of Pharmaceutical Care and Health Systems,
          University of Minnesota; Dr. Gerard Anderson, Ph.D.,
          professor and director, Center for Hospital Finance and
          Management, Bloomberg School of Public Health, Johns
          Hopkins University; and Fiona M. Scott Morton, Ph.D.,
          professor of economics, Yale School of Management, Yale
          University.................................................    31
            Anderson, Dr. Gerard, Ph.D...............................    33
            Morton, Fiona M. Scott...................................    45
            Schondelmeyer, Dr. Stephen, Pharm.D., Ph.D...............    31
        Weems, Kerry, Acting Administrator, Center for Medicare and
          Medicaid Services, U.S. Department of Health and Human
          Services...................................................    80
    Letters, statements, etc., submitted for the record by:
        Anderson, Dr. Gerard, Ph.D., professor and director, Center
          for Hospital Finance and Management, Bloomberg School of
          Public Health, Johns Hopkins University, prepared statement
          of.........................................................    34
        Merritt, Mark, president and chief executive officer,
          Pharmaceutical Care Management Association, prepared
          statement of...............................................   114
        Morton, Fiona M. Scott, Ph.D., professor of economics, Yale
          School of Management, Yale University, prepared statement
          of.........................................................    47
        Murphy, Hon. Christopher S., a Representative in Congress
          from the State of Connecticut, statement of America's
          Health Insurance Plans.....................................   173
        Precht, Paul, director of policy and communications, Medicare
          Rights Center, prepared statement of.......................   141
        Smith, Rick, senior vice president for policy, Pharmaceutical
          Research and Manufacturers Association [PhRMA], prepared
          statement of...............................................   130
        Stein, Judith, executive director, Center for Medicare
          Advocacy, prepared statement of............................   158
        Waxman, Hon. Henry A., a Representative in Congress from the
          State of California:
            Prepared statement of....................................    20
            Staff report.............................................     3
        Weems, Kerry, Acting Administrator, Center for Medicare and
          Medicaid Services, U.S. Department of Health and Human
          Services, prepared statement of............................    82

    THE MEDICARE DRUG BENEFIT: ARE PRIVATE INSURERS GETTING GOOD DISCOUNTS
                               FOR THE TAXPAYER?

                                  ----------

                            THURSDAY, JULY 24, 2008

                              House of Representatives,
                  Committee on Oversight and Government Reform,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 10:10 a.m., in
    room 2154, Rayburn House Office Building, Hon. Henry A. Waxman
    (chairman of the committee) presiding.
        Present: Representatives Waxman, Cummings, Kucinich,
    Tierney, Watson, Higgins, Yarmuth, Braley, Van Hollen, Murphy
    of Connecticut, Sarbanes, Speier, Davis, Burton, Shays, Platts,
    Issa, Marchant, McHenry, Foxx, Bilbray, and Jordan.
        Staff present: Kristin Amerling, general counsel; Caren
    Auchman and Ella Hoffman, press assistants; Phil Barnett, staff
    director and chief counsel; Jen Berenholz, deputy clerk; Brian
    Cohen, senior investigator and policy advisor; Miriam Edelman,
    Jennifer Owens, and Mitch Smiley, special assistants; Earley
    Green, chief clerk; Karen Lightfoot, communications director
    and senior policy advisor; Karen Nelson, health policy
    director; Andy Schneider, chief health counsel; Leneal Scott,
    information systems manager; John Williams, deputy chief
    investigative counsel; Lawrence Halloran, minority staff
    director; Jennifer Safavian, minority chief counsel for
    oversight and investigations; Ali Ahmad, minority deputy press
    secretary; Larry Brady, minority senior investigator and policy
    advisor; Patrick Lyden, minority parliamentarian and Member
    services coordinator; Brian McNicoll, minority communications
    director; John Ohly and Molly Boyl, minority professional staff
    member; and Jill Schmaltz, minority senior professional staff
    member.
        Chairman Waxman. Good morning. The committee will please
    come to order.
        Today, the committee is holding another hearing in our
    series on how to make government work better. Our subject is
    the Medicare Part D program that provides a prescription drug
    benefit to seniors and individuals with disabilities.
        Providing drug coverage to seniors and the disabled is
    essential, but it is also expensive. Over the next decade, the
    benefit will cost taxpayers hundreds of billions of dollars. We
    need to make sure this money is spent responsibly and with good
    value for the taxpayers.
        This committee has been investigating Medicare Part D for
    18 months. During our investigation, we have conducted the only
    in-depth oversight of the Part D program. GAO and the
    Congressional Budget Office have been unable to review how well
    the program is working because the Centers for Medicare and
    Medicaid Services won't give them the data; and CMS, which does
    have access to data, refuses to acknowledge fundamental flaws
    in the program.
        Last October, I and other members of the committee released
    a staff report that examined the administrative costs of
    Medicare Part D. We found that the private insurers that
    delivered the Medicare benefit are charging taxpayers and
    beneficiaries $4.6 billion in administrative costs annually. In
    percentage terms, that is over six times more than it costs to
    run traditional Medicare. And we found that the Part D program
    is exceptionally lucrative for private health insurers. They
    made a billion dollars in profit last year alone.
        Today, I am joining with 10 members of the committee to
    release a new staff report, which I ask to be made part of
    today's hearing record. Without objection.
        [The information referred to follows:]

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        Chairman Waxman. Last year's report looked at the profits
    of the private insurers. Today's report examines the windfall
    revenues of the drug manufacturers. In this report, we compare
    the prices that the drug companies charge the new Medicare Part
    D program with the prices that the companies charged the
    Medicaid program.
        What we discovered is that the taxpayers are paying far
    more for drugs under Medicare Part D than they do under
    Medicaid. In effect, Medicare Part D has given the major drug
    companies a taxpayer-funded windfall worth billions of dollars.
        Our report focuses on the cost to the taxpayer of providing
    drugs to the 6 million beneficiaries who are enrolled in both
    Medicare and Medicaid. These are Americans who are old or
    disabled enough to qualify to be on Medicare, and they are poor
    enough also to qualify for Medicaid. They are often the oldest
    and sickest Medicare beneficiaries and their drug coverage is
    almost fully subsidized by Federal taxpayers. ``Dual
    eligibles'' is what they are called, and these dual-eligible
    beneficiaries account for about half of all drug spending in
    Medicare Part D.
        The multibillion-dollar windfall is a result of a provision
    in the Medicare Part D law that switched drug coverage for the
    dual eligibles from Medicaid to Medicare Part D. The transfer
    took effect 2 years ago. Since then, the drug manufacturers
    have been paid billions more for the drugs used by the dual-
    eligible beneficiaries than they would have been paid if the
    dual eligibles had continued to receive their drug coverage
    through Medicaid.
        Under Medicare Part D, the 6 million dual-eligible
    beneficiaries take the same drugs they got under Medicaid; the
    only difference is that the Federal taxpayer is now paying 30
    percent more. Add it up and it amounts to a drug manufacturer
    windfall worth at least $3.7 billion in just the first 2 years
    of the Medicare Part D program. In fact, the actual windfall
    could be worth billions more if all drugs used by dual-eligible
    beneficiaries were taken into account.
        Let me describe some examples. Johnson & Johnson earned
    over $500 million in additional profits, much of it from just
    one drug, the antipsychotic medication Risperdal. Bristol Myers
    earned a windfall of almost $400 million thanks to the higher
    prices for the stroke medication Plavix. This is an enormous
    giveaway, and it--it has absolutely no justification. The drug
    companies are making the same drugs, they are being used by the
    same beneficiaries, yet because the drugs are being bought
    through Medicare Part D instead of Medicaid, the prices paid by
    the taxpayers have ballooned by billions of dollars.
        The privatization of Medicare Part D is a great deal for
    the drug companies, And it is a great deal for the private
    insurers. It is the taxpayers who are taking it on the chin.
        The circumstances that led to passage of the Medicare Part
    D were controversial. The chairman of the House committee that
    wrote the Part D law now runs PhRMA, the drug manufacturers
    trade association. The administration's top negotiator left the
    government to lobby for health insurers and drug companies.
        There were allegations of threats and arm-twisting on the
    House floor. But that is not the focus of today's hearing. The
    Medicare drug benefit is providing real help to seniors and the
    disabled, and it is going to be part of our health care
    landscape for years to come.
        The key question for us is, how we can fix the program so
    that more of the benefit goes to seniors and the disabled and
    less winds up in the pockets of the drug companies and
    insurers.
        Medicaid is one proven model for how the government can use
    its purchasing power to ensure that it gets low prices.
    Medicaid is a voluntary program. No drug manufacturers are
    required to participate. Medicaid gets its low prices by making
    discounts a condition of manufacturers participating. The
    program says that if a manufacturer wants to sell their drugs
    to Medicaid beneficiaries, they have to offer Medicaid their
    lowest prices. The manufacturers also have to agree to protect
    the taxpayers from price increases that exceed the rate of
    inflation.
        We have well over a decade of operational experience with
    the Medicaid rebate. It works. It delivers $10 billion annually
    in savings to the Federal and State governments. In many ways,
    this is the exact opposite of what is going on under Medicare
    Part D. Under Part D, the drug manufacturers can charge
    essentially what they want. Despite their high administrative
    costs and billion dollar profits, the private insurers have
    been unable to stand up for the interest of the taxpayers.
        Now, many of our hearings on waste, fraud and abuse
    identify problems that the executive branch can fix
    administratively; that is not the case with Medicare Part D.
    The waste in this program is the direct result of the statutory
    design of the law. Congress wrote this law and must lead the
    way to a solution. To start this process, I will soon be
    introducing legislation that will protect the taxpayer by
    bringing down the high drug prices in Medicare Part D. This
    bill will guarantee that Federal taxpayers cannot be charged
    higher prices for the dual-eligible beneficiaries under
    Medicare Part D than under Medicaid.
        The potential savings to Medicare and the Federal taxpayers
    are enormous. Passage of reform legislation could save the
    taxpayer almost $90 billion over the next 10 years; even more
    could be saved if the Federal Government were to authorize to
    negotiate prices on behalf of all Medicare beneficiaries.
        I am looking forward to hearing more about this issue today
    and working together with the members of this committee to
    improve the Part D program. I will be introducing our
    witnesses, who I'm grateful are here today. All of them are
    here voluntarily.
        But before we do that, I want to recognize Mr. Davis for an
    opening statement.
        [The prepared statement of Chairman Waxman follows:]

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        Mr. Davis of Virginia. Well, thank you, Mr. Chairman.
        The Medicare prescription drug program, known as Part D,
    has successfully provided needed medicines to millions of
    American seniors. The proof is in the pudding: Overwhelming
    number of seniors have opted into this program. It is an
    optional program that speaks for its success. While only in its
    third year of operation, Part D continues to come in below
    initial budget projections.
        Nevertheless, even with all of its successes, Medicare Part
    D, like any Federal program, could benefit from thoughtful,
    evenhanded oversight; and I hope that is our goal here today.
    But I'm not convinced there is much constructive to be learned
    simply by comparing controlled prices under Medicaid and market
    prices under Part D and labeling the entire difference a
    windfall.
        The majority staff analysis released this morning focuses
    on dual eligibles, seniors eligible for both Medicare and
    Medicaid. Before 2006, they received prescription drug
    insurance through Medicaid which uses statutory price controls.
    At the request of States and many senior citizen advocates,
    dual eligibles were included under Part D. Not surprisingly,
    market-negotiated drug prices for this special population were
    found to be higher than the legally mandated, below-market
    Medicaid rates.
        But any alleged windfall, however large, tells really less
    than half the story. That difference buys dual-eligible seniors
    access to drugs not available under Medicaid's more restrictive
    pharmacy rules, and capturing the alleged savings would be
    short lived and painful. It would come at a very, very high
    cost as other segments of the health care delivery system,
    nongovernment segments--we are talking about employer plans,
    union plans--payments for the uninsured would then absorb the
    cost shifts that are inevitably generated by price controls.
        This is not just a theoretical argument about how free
    markets work. The Federal Government does have almost 20 years
    of experience with the implications of prescription drug price
    controls. The Congressional Budget Office and the Government
    Accountability Office both have repeatedly found that Medicaid
    price controls increase prescription drug prices to every other
    purchaser.
        Transplanting Medicaid price controls onto Part D could
    have other unwanted implications. We should be very concerned
    about a Federal Government process to set Part D prices that
    would turn into a political exercise. There would be enormous
    political pressure to pick winners and losers.
        Elsewhere in Medicare, relentless lobbying shifts and
    shapes reimbursement policies for some services or specialties
    over others; and it is not a very pretty process. Just a couple
    of weeks ago, Medicare physicians almost took a 10 percent
    reimbursement cut at the hands of a government-run pricing
    system.
        Given the critical role of Medicare in caring for seniors
    as they age, we should conduct oversight of the program, but it
    strikes me that this committee's discussion of Part D is stuck
    in a rut. With every new report and each successive hearing, I
    understand Yogi Berra's concept of ``deja vu all over again.''
    Repeatedly making economically and plausible arguments about
    the efficiency of government-run drug pricing or plucking
    artificial windfalls from thin air won't make Part D, a good
    program, work any better.
        It is running well under the original 2003 budget
    projections, due largely to lower-than-anticipated bids from
    prescription drug plans. That is what happens in the free,
    competitive market. And most importantly, opinion surveys
    report that 85 percent of Part D beneficiaries are happy with
    the program, the 15 percent obviously on the other side of the
    aisle here, with the satisfaction rate even higher among the
    dual eligibles.
        Meanwhile, other aspects of the program urgently need
    scrutiny. We could be talking about Medicare payments for
    durable medical equipment prescribed by physicians or the
    serious financial trouble facing Part A, Medicare hospital
    insurance, which is due to go bankrupt in 11 years.
        The bedrock of the program, Part A, is in dismal shape. The
    Medicare trustees reported this year the Hospital Insurance
    Trust Fund will be insolvent in 2019. When that happens,
    payments can no longer be made to cover seniors' hospital care.
    There is no authority in current law to allow general revenue
    funding of that shortfall. We obviously--we fund Part B.
        I look forward to our oversight hearings on these pressing
    issues today.
        Chairman Waxman. We are pleased to welcome for our first
    panel, Dr. Stephen Schondelmeyer, who is a Ph.D. and professor
    and head of the Department of Pharmaceutical Care and Health
    Systems at the University of Minnesota; Dr. Gerard Anderson,
    Ph.D., professor and director for the Center for Hospital
    Finance and Management, Bloomberg School of Public Health at
    Johns Hopkins University; Fiona M. Scott Morton, Ph.D.,
    professor of economics, Yale School of Management, Yale
    University.
        We are pleased to have the three of you here today. It is
    the practice of this committee that all witnesses testify under
    oath. So if you would please stand.
        Mr. Davis of Virginia. Mr. Chairman, could I just note for
    the record, Dr. Schondelmeyer is the majority's witness who, 2
    weeks ago, was given notice of this; and we have not yet
    received written testimony from him.
        Our minority witness has submitted his for the record ahead
    of time for scrutiny. Thank you.
        Chairman Waxman. Thank you, Mr. Davis. If the three of you
    would please stand and raise your right hands.
        [Witnesses sworn.]
        Chairman Waxman. The record will indicate that each of the
    witnesses answered in the affirmative.
        Dr. Schondelmeyer, we are going to start with you, but Mr.
    Davis made a very good point that we expect witnesses to submit
    their statements in advance under the rules. Please go ahead.
        Did you submit a statement to us, a written statement?
        Mr. Schondelmeyer. I have not yet. I can after this
    meeting. I do apologize.
        Chairman Waxman. Turn on the mic. Yes, there is a button on
    the mic.
        Mr. Schondelmeyer. I do apologize. I accepted this
    assignment with many other commitments, and this was a very
    tight schedule for me, given other commitments. But I was
    pleased to do so and----
        Chairman Waxman. We're happy to have you here anyway.
    Thanks.
        We are going to ask each of you, as we will all of our
    witnesses, to try to keep within 5 minutes. I think you all
    have been informed of that in advance. And if you have
    submitted written statements, they will be part of the record
    in full. We're going to have a clock that will be green for 4
    minutes, yellow for 1 minute and then when the 5 minutes is up,
    it will turn red. We're not going to be abrupt in stopping you,
    but I hope that red will be an indication that it is time to
    get ready--get ready and to conclude.
        Thank you. Please go ahead.

       STATEMENTS OF DR. STEPHEN SCHONDELMEYER, PHARM.D., Ph.D.,
       PROFESSOR AND HEAD, DEPARTMENT OF PHARMACEUTICAL CARE AND
     HEALTH SYSTEMS, UNIVERSITY OF MINNESOTA; DR. GERARD ANDERSON,
    Ph.D., PROFESSOR AND DIRECTOR, CENTER FOR HOSPITAL FINANCE AND
     MANAGEMENT, BLOOMBERG SCHOOL OF PUBLIC HEALTH, JOHNS HOPKINS
      UNIVERSITY; AND FIONA M. SCOTT MORTON, Ph.D., PROFESSOR OF
         ECONOMICS, YALE SCHOOL OF MANAGEMENT, YALE UNIVERSITY

        STATEMENT OF DR. STEPHEN SCHONDELMEYER, PHARM.D., Ph.D.

        Mr. Schondelmeyer. Thank you, Mr. Chairman, for inviting--
    --
        Chairman Waxman. Pull your mic a little closer.
        Mr. Schondelmeyer. Thank you for inviting me and thank you
    to the rest of the committee. I will skip the normal
    formalities and broad background descriptions, because you've
    done that well in your introduction.
        The dual eligibles, as was noted, however, represent a
    large share of the expenditures both under the previous
    Medicaid program and under the current Medicare Part D program.
    Just to put that in perspective, in the year 2005, total
    Medicaid drug expenditures were about $43 billion a year. In
    2006, after those dual eligibles moved from Medicaid over to
    Medicare, the Medicaid drug expenditures dropped to less than
    half of that $43 billion, somewhere around $21 billion. So it
    is very real that this shift did move dollars from the State-
    run Medicaid programs to the private, market-run Part D
    Medicare programs.
        At the same time that shift occurred, also the access to
    the rebates under the State-run Medicaid programs disappeared.
        Let me put in perspective rebates, briefly, under Medicaid.
    The Medicaid drug rebate program began back in 1991 and
    continues to this day. There is a Federal component to the
    Medicaid drug rebate program which mandates 15.1 percent rebate
    for all brand-name drugs, and in addition for brand-name drugs,
    they are subject to a best-price additional rebate and an
    inflation adjustment rebate that often adds substantially
    beyond that 15.1 percent for all brand-name drugs. For generic
    drugs, all generic drugs must provide an 11 percent rebate.
        Now, notice in both brand-name and generic drugs, all
    prescription drugs are subject to rebates. That is not
    necessarily the case today. Under the Medicare Part D program,
    not all drugs are subject to rebate; and particularly those
    drugs that are covered under the must-cover categories, the
    categories where the Part D plans can't negotiate or opt to
    cross different drug categories, those don't appear to receive
    as much rebate, although under the Medicaid program they did
    receive the same amount of rebate--at a minimum at least--as
    the other brand-name drugs.
        Second, the amount of rebates from 1991--it took a year or
    two to get the program stabilized. From 1993 to 2000, about 18
    to 19\1/2\ percent of total drug spending came back to Medicaid
    programs as rebates. So about 18 to 19\1/2\ percent came back.
        Beginning in 2000-2001, though, the States woke up and
    realized that the Medicaid legislation also authorized States'
    supplemental rebate programs. In those State supplemental
    rebate programs, it said States could negotiate on their own
    rebates above and beyond the Federal rebate, and that has
    started to grow.
        In the early--2000 through 2003, we saw rebates grow to 20-
    21 percent. And then we saw a dramatic growth; in 2004 rebates
    grew to 24 percent of the total drug spend, 2005 rebates under
    Medicaid grew to 28.8 percent of the drug spend.
        Unfortunately, to the best of my knowledge, CMS has not
    released the rebate data for the years 2006 and 2007 under
    Medicaid, so we can't look to see what the total amount is. As
    best I can tell from talking with various States out there,
    however, the number is probably somewhere above 30 to 31
    percent total drug spend returned in rebates.
        Now, that compares with--this committee did a report a year
    ago that suggested only about 8 percent of the drug spend under
    Medicare Part D was coming back as rebates, and that wasn't for
    all drugs and all classes. So if you compare 28.8 or 30 percent
    rebates on Medicaid to 8 percent on Medicare--and I understand
    your new report shows that the number has gone up under
    Medicare Part D, but it is still less than half of what the
    rebate amount was under the Medicaid program--it is obvious
    that if these same dual eligibles remained in the Medicaid
    program, the taxpayers and the beneficiaries themselves would
    benefit from lower drug spend, as you pointed out, Mr.
    Chairman, on the same drug, the same people. It--just at a
    lower price in the marketplace. And those are based on State-
    negotiated supplemental rebates, not mandated rebates. They are
    negotiated with the States above and beyond the Federal rebate.
        So it is also important to realize, under the Medicare Part
    D program, that the dual eligibles and the people on the
    private side do not receive the benefit of these rebates in
    lower drug price for most cases. You can find the odd drug,
    there may be a handful of 10 or 15 drugs where a lower price is
    actually passed on to the recipients, but for the most part,
    lower prices are not passed onto the recipient. And the
    coverage gap, the person pays the entire cost of the drug
    without the benefit of any of the rebate. And for specialty
    drugs, where they may be paying 50 to 75 percent coinsurance,
    they're paying the entire cost of the drug without the benefit
    of the rebates.
        In conclusion, it is not just observations of State
    accountants and academics like myself that say this was a shift
    in resources. Also Wall Street and corporate annual reports in
    both 2006 and 2007 noted that drug companies had substantially
    increased revenues that heretofore had been unexpected due
    largely, in part, to volume increases under Medicare Part D and
    the decreased payment for rebates under Part D versus under
    Medicaid.
        Thank you very much, Mr. Chairman.
        Chairman Waxman. Thank you, Mr. Schondelmeyer.
        Dr. Anderson.

                STATEMENT OF DR. GERARD ANDERSON, Ph.D.

        Mr. Anderson. Thank you, Chairman Waxman. It is a pleasure
    to return to this committee to talk about the issue of drug
    pricing.
        My testimony can be summarized in two observations and
    three recommendations.
        My first observation is that Part D plans paid even higher
    prices for drugs than Medicaid programs were paying. My second
    observation is the United States pays significantly higher
    prices for prescription drugs than other countries and that, in
    the United States, the private sector pays generally 20 percent
    higher prices than the public sector pays for drugs.
        These two observations lead me to three recommendations.
    First, there should be greater price transparency in the
    pharmaceutical market. Second, drug pricing data should be
    readily accessible to congressional agencies and academic
    researchers so they can easily know if Part D plans are paying
    higher prices than Medicaid. And third of all, all government
    agencies should be paying the same prices for drugs.
        The remainder of my testimony will explain in greater
    detail the rationale behind these observations and
    recommendations.
        When the responsibility for providing drug coverage for the
    dual eligibles was transferred in 2005, the expectation, or
    even the hope, was that Part D plans would be able to obtain
    lower prices than the Medicaid programs. Unfortunately, a
    growing body of data, including the report today, suggest that
    Part D plans are paying even higher prices than Medicaid
    programs. Amazingly, all the data seems to confirm that the
    windfall to the drug companies is about $2 billion a year.
        The first indication of higher prices came from the
    disclosures by the pharmaceutical companies themselves in their
    10-Ks and 10-Qs filed with the Security and Exchange
    Commission. My written testimony cites specific documents,
    showing that the pharmaceutical companies were getting higher
    prices than Part D. Pfizer alone, for example, estimated in its
    10-Q an additional $300 million in profits.
        Second, in my report, I show how CBO-CMS actuary data
    estimate using that data that Part D plans were paying 22
    percentage points more than Medicaid was paying for the same
    drug. This committee says 30 percent; the CMS testimony today
    says 20 percent. So they are all in pretty much the same range.
        The third indication was the report by this committee last
    year. So basically all the different sources--and as a
    researcher you want to have multiple sources--then, the
    transfer from the dual eligibles will result in about a $2
    billion annual windfall to the drug companies; and it is
    currently in line with the report of this committee.
        Surprisingly, the Medicare program is not the insurer
    paying the highest prices for drugs in the United States.
    Typically, the private sector pays 20 percent more for drugs
    than the Medicare and Medicaid programs.
        The fact that Part D plans were unable to obtain
    substantial discounts from the pharmaceutical companies is
    surprising to me, given the difficulties that the Medicaid
    agencies have obtaining actual transaction prices to set their
    own rates. In a series of recent court decisions, judges and
    juries have found that this lack of price transparency has made
    it difficult for the Medicaid agencies to actually set prices.
        President Bush has argued that there should be greater
    price transparency in the health care sector. When the Bush--
    while the Bush administration has promoted major efforts to
    increase the level of price transparency in the hospital and
    physician sectors, surprisingly there has been very little
    emphasis on price transparency in the pharmaceutical sector.
        In order to make greater price transparency, I believe the
    Secretary of Health and Human Services should determine in the
    markets are actually working for pharmaceuticals. One way to
    determine this is to compare the lowest prices that any of the
    Part D plans are obtaining and compare to the prices that the
    Medicaid programs, the VA or even Canada are obtaining.
        Unfortunately, provisions in the MMA limit disclosure of
    information on drug prices and drug utilization. This data
    should be given to CBO, CRS, MedPac and other government
    agencies to analyze the effectiveness of the Part D program. It
    should also be given to academic researchers.
        My third and final recommendation is that all government
    programs should pay the same rate for each drug. I cannot think
    of a compelling reason, either economically or ethically, why
    one government program, save the VA, should pay a higher price
    or a lower price through the Medicare program; all the money
    comes from the taxpayers. Governments in other countries manage
    to pay one price for drugs. Why not the United States?
        Thank you for the opportunity to testify this morning.
        Chairman Waxman. Thank you very much, Dr. Anderson.
        [The prepared statement of Dr. Anderson follows:]

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        Chairman Waxman. Dr. Morton.

                   STATEMENT OF FIONA M. SCOTT MORTON

        Ms. Morton. Good morning to the chairman and members of the
    committee. Thank you very much for inviting me to testify. I
    just have some short remarks.
        The report that was released this morning repeatedly says
    that manufacturers charge more to Part D than they charge to
    Medicaid. I just would like everyone to keep in mind that the
    manufacturers--under Medicaid, they sell to drugstores in the
    normal way, and then they are required to give a rebate back to
    the government. And that is how we get a net price; it is not a
    charged price.
        And the size of that rebate is set in law; and the
    important thing, I think, that we see today, that we didn't see
    in the early 1990's, was the size of the inflation component of
    that. And that is not something that Part D can negotiate for.
    That inflation component is big, and it is mandated under
    Medicaid.
        So I would say that the findings of the report are
    completely predictable in the sense that we knew that Medicaid
    was required to get the lowest price, and we knew it had these
    big rebates. And so, of course, that is going to be, as Mr.
    Davis said, the place where you've got the lowest prices, and
    we wouldn't expect Part D to be able to do as well as that.
        So I think if Congress is concerned about just the cost of
    covering duals, then you should move them back into Medicaid. I
    mean, that is where you're going to get the lowest prices for
    these people. It would also reduce confusion for them and plan
    shifting as the plan they are in becomes too high cost and
    they're moved to another plan that--I believe that kind of
    transition is difficult.
        Second, the report finds that the protected classes in Part
    D get small discounts. Again, I'm going to take this
    opportunity to say that when I testified for the Senate in
    January 2007, I predicted this, because you can't move market
    share in these groups. The formularies are restricted and the
    Part D plans have to cover all drugs, essentially; and if you
    can't bargain with the manufacturer, saying, I'm going to move
    market share to Drug A from Drug B, you can't get a discount.
    And I think it is very reasonable then to see that you're not
    getting discounts in these protected classes.
        Again, this is something you could change with respect to
    the regulation. You could have fewer protected classes, you
    could loosen the formulary restrictions so that plans can do a
    bit more shifting of market share from one drug to another; and
    then you'd expect to see bigger discounts.
        Third, we have talked a lot about the windfall that has
    arisen from moving guys from Medicaid into Medicare. I have
    some research looking at the opposite effect, which is the
    movement of the uninsured from paying cash to having coverage
    under Medicare, and there the windfall appears to have gone in
    the opposite direction. So the prices that an uninsured, cash-
    paying person pays are a lot higher than--now, I don't have the
    same access to information as you do, Mr. Waxman, so I'm
    inferring it from some less-good data, but it looks like the
    prices are going down quite drastically.
        So we do have success of the program in helping the
    uninsured get access to drugs at lower prices. But--so I just
    would like to point that out, since we have the windfall going
    the other way as well.
        Then two--just points that are longer run. First of all, I
    think this committee might want to return to this question next
    year because the way the negotiations work is, they happen in
    February for prices to set in November for the next year. So
    when you think about the experience with the program, it wasn't
    until February 2007 that plans and everybody could watch a
    whole year of operation of this program. And so it wasn't,
    therefore, until prices were set for 2008 that you see kind of
    informed outcomes, as opposed to just guessing what are people
    going to do and where are they going to enroll. So I think we
    can learn more going forward.
        And then, last, it seems messy and costly to me to try to
    have a Medicaid rebate applied to some purchases inside
    Medicare. It seems just--because you get those rebates. The
    supplemental rebates come from shifting, having a preferred
    drug; the Medicare Part D rebates come from having a preferred
    drug. So trying to get a plan to have a Medicaid rebate for a
    guy who is in their Medicare plan that they are trying to
    negotiate over with the manufacturers, that seems very complex
    to me. I think it would be just easier to move them, for the
    plan.
        And I think that--oh, the last thing about the Medicaid
    rebates is, they are large and they really reduce the
    profitability, of course, of selling to the Medicaid program. I
    think that works partly because the Medicaid program is small,
    so if it is 12, 15, 18 percent of the Nation's drug spending,
    the manufacturers can afford and should be interested in
    providing medications at low cost to those poor people who are
    also sick.
        But when you think about Medicare, 40 percent of all
    prescriptions are doled out to people who are eligible for
    Medicare. I mean, by the time you add on Medicaid--that's half
    the market--you're then talking about a very serious change in
    the market structure of the pharmaceutical industry.
        Thank you. That's all.
        Chairman Waxman. Thank you very much.
        [The prepared statement of Ms. Morton follows:]

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        Chairman Waxman. I'll start off the question--5 minutes of
    questions.
        That was an interesting point you just raised about the
    Medicaid population being so much smaller than the Medicare
    population, but when we talk about dual eligibles, we are
    talking about half the budget for pharmaceuticals under Part D.
        You're shaking your head. You acknowledge that fact?
        Ms. Morton. Yes, I think not everybody who is Medicare
    eligible is enrolled in Part D. So the current proportion of
    duals is quite high relative to all the people who could be
    signing up for Part D going forward.
        Chairman Waxman. If we paid the Medicaid price for those
    dual eligibles, there would be a tremendous savings. Do you
    agree?
        Ms. Morton. Oh, there would. Because we used to have them
    in Medicaid where these regulated prices were below market
    level. Absolutely.
        Chairman Waxman. Do you think that did any harm to the
    ability of the prescription drug industry to do their research,
    market their products?
        Or is it a small amount so that the controls on those
    prices, requirements of discounts--it did not have an adverse
    effect?
        Ms. Morton. It is hard to know what the ideal amount of
    research and development is, so I won't tread in that area. But
    in terms of where we were before with kind of 18 percent of
    spending in Medicaid, seemed like, you know--if you take that
    as a benchmark, you know, it seemed not so terrible to me;
    whereas I feel like half of all spending being subject to these
    rules is really pretty drastically different and moves us a lot
    more toward a single payer--you know, national health almost.
        Chairman Waxman. As I hear the testimony of the three of
    you, you all seem to agree that our report is accurate. Is that
    a fair statement?
        Start with Dr. Schondelmeyer.
        Mr. Schondelmeyer. Yes, it is. I think it is quite
    accurate. And I'm not sure it takes fully into account the
    effect of State supplemental rebates.
        I would point out that your own State of California gets
    about 40 percent of their total drug spend back in rebates. And
    those State supplemental rebates are negotiated, not
    government-set prices. They are negotiated with the drug
    companies based on movement of market share and the same tools
    that the private Part D plans have available.
        So why is it that States can negotiate up to a 40 percent
    rebate, an additional 20 percent on top of what the Federal
    rebate is, and the private Part D plans can only get 8 to 14
    percent rebates? I don't know.
        Chairman Waxman. And, of course, our report was only on the
    100 most-prescribed drugs. There are other drugs beyond that,
    as well, for which there could be a greater savings or that we
    are paying far more for than we otherwise might have to.
        Mr. Schondelmeyer. Could--but given what I know about the
    market and how rebates work, I would be willing to wager that
    there are even smaller rebates on the rest of the drugs in the
    market than the 100 you looked at.
        Chairman Waxman. I see. OK.
        Dr. Anderson, what is your view?
        Mr. Anderson. I agree that these numbers are quite
    accurate.
        I think you have to look at it from a variety of different
    perspectives. One is from the 10-Ks and the 10-Qs, and you add
    up those that they report, you'll get to about $2 billion. Then
    you sort of look at the differential in the prices between
    Medicare and Medicaid, and it is about a 20-25 percent
    differential. You do those and you get about a $2 billion
    number.
        So I think, from a variety of sources, we are seeing that
    your numbers are quite accurate; and I wish we had access,
    actually, to your numbers so we could look at them. As
    researchers, I think it is really important.
        Chairman Waxman. And, Dr. Morton, as I heard your
    testimony, you confirmed the committee staff's findings? You
    can't tell us exactly that we are correct because you don't
    have the same data, but you confirmed the fact that we're
    paying far more under Part D for these dual eligibles?
        Ms. Morton. That's consistent with what I know.
        The States get supplemental--can negotiate for supplemental
    rebates. They get the best price on a brand and there is the
    inflation component, and Part D can't mimic those latter two.
    They can mimic the supplemental, but they can't get the
    inflation piece, for example.
        And then, second, looking outside the drugs that you
    examined, I would actually think the rebates would be bigger
    for Part D. And the reason is----
        Chairman Waxman. You would agree with Dr. Anderson?
        Ms. Morton. Yes. Because the big drugs for the duals are
    largely in the protected classes where, as I said, there is
    less ability to negotiate.
        Outside the protected classes, you would expect more
    negotiation, more market share shifting and bigger rebates.
        Chairman Waxman. These are protected classes because they
    are drugs that--there is no other alternative to those drugs
    and they are life saving; is that basically right?
        Ms. Morton. I think there is also a second factor, which is
    that you're trying to stop Part D plans from engaging in
    adverse selection, from cream-skimming in taking healthy
    people. And if you offer only one HIV drug on your formulary,
    you're not going to attract the sick people.
        Chairman Waxman. So we protect those classes of drugs, and
    it is important that we do so for the well-being of the people.
        Ms. Morton. That's right.
        So in some sense that is why I suggest moving these guys
    back into Medicaid, given--if you're concerned, for this
    reason, about having a restrictive formulary, then, you know,
    that going to cost you.
        Chairman Waxman. Thank you.
        Mr. Davis.
        Mr. Davis of Virginia. Thank you.
        Of course, the problem is, these folks don't want to go
    back into Medicaid. But that is a political issue the other
    side will have to deal with.
        Dr. Scott, let me ask you. We keep referring to private
    sector price controls that would result from Medicaid price
    regulation being extended to Part D. Can you elaborate on the
    expected impact of extending price controls to the Part D
    program on the following groups: employers, employees, unions
    and uninsured?
        Ms. Morton. Certainly. If you have--the best price
    provision of the Medicaid rebate rules is the critical thing.
    So if I, as a manufacturer, offer a low price to any private-
    sector buyer, I have to offer that same--effectively, the way
    the rebate works--I have to offer that same low price to
    Medicaid. So the bigger--so that gets expensive as the group
    that gets that forced rebate gets bigger.
        So as that group getting bigger and bigger, which it would
    be if you put in duals or all of Medicare or whatever, then I
    don't want to give a discount anymore, as a manufacturer,
    because if I give a discount to even one party, I have to give
    to the entire portion of the market covered by that best price.
    And that causes discounts for private-sector employers, for
    everybody else.
        Mr. Davis of Virginia. The extension of the philosophy over
    there is just, why not just fix prices for everybody; that at
    the end of the day, if you fix prices, that somehow the drug
    companies are going to go along and just take it?
        What you are arguing is, they make it up somewhere else
    along the way.
        Ms. Morton. Well, they are going to have an incentive to
    eliminate those discounts elsewhere in the economy and will
    move toward a more uniform pricing where everybody pays the
    same price and nobody can negotiate for a discount.
        And that is dangerous, I believe, because the way we run
    our intellectual property is that these brands have patent
    protection, and the way to create price competition when two
    molecules have patent protection is to threaten to substitute
    one for the other and get a discount. If you can't do that
    because of the best price regulation, then you undermine price
    competition.
        Mr. Davis of Virginia. One of the problems with Medicaid is
    that you don't get the same breadth of offerings, isn't that
    right, that you would get Medicare Part D?
        Ms. Morton. Technically, it is supposed to be an open
    formulary, but I believe the supplemental rebate States are
    negotiating for depend most now on having a preferred drug and
    then a list where the physician has to get prior authorization
    to prescribe the drug, so that effectively you're getting a
    narrow formulary. That's right.
        Mr. Davis of Virginia. Dr. Anderson, do you want to
    comment?
        Mr. Anderson. I would say, if you would compare the
    formularies between Medicaid and any of the private-sector
    plans, you would see that Medicaid has a much broader formulary
    than most of the private-sector plans.
        Mr. Schondelmeyer. I would agree with that.
        Mr. Davis of Virginia. But they limit the number of
    prescriptions that can be filled at any one time, right?
        Mr. Anderson. Some of the States do have those as ways to
    control expenditures, yes. But the formularies are quite
    extensive.
        Congress essentially mandated that in OBRA 1990 and
    essentially said that all State Medicaid programs had to offer
    all drugs and have access provisions in there to make sure that
    they are available to all communities, all beneficiaries.
        So it is quite an open program.
        Mr. Davis of Virginia. But does a large formulary matter if
    you can't fill the prescription?
        Mr. Anderson. Essentially, that is the problem of the
    States having not enough money in their Medicaid programs, and
    so they are making choices here as to how to save money; and I
    would not do that, but that's the choices that they have, given
    limited resources.
        Mr. Davis of Virginia. Well, I know in Virginia we have
    gone from Medicaid, 10 years ago, being zero percent of the
    State budget to, now, 17 percent of the State budget. It has
    crowded out education and everything else. It is a huge--I
    wouldn't say completely unfunded Federal--but it is a Federal
    mandate that carries with it a lot of costs.
        And, of course, States have to balance their budgets. We
    don't. There is just, I think, a huge problem.
        Let me ask, long term on price controls; I'll ask each of
    you. Are you surprised to learn that in the first 4 years after
    the government mandated Medicaid price controls in order to
    control prescription drugs spending, that spending actually
    increased by 40 percent? Does that surprise anybody?
        Dr. Morton.
        Ms. Morton. I think spending on drugs--it doesn't surprise
    me, but it might be due partially to the best-price legislation
    that was passed in 1991, but it also might be due to
    technological change. We invent new drugs, people want to
    consume them. The population is aging, more people are on the
    disability rolls; we're just consuming more health care.
        Mr. Davis of Virginia. Do prescription drug price controls
    hold down spending over time? I mean, immediately, obviously,
    price controls, we know they have an immediate effect; but over
    time, how does the marketplace reflect that?
        Ms. Morton. One of the things you have to realize when
    you're engaging in this kind of price regulation is that the
    manufacturer will have some kind of optimal response. So they
    will raise prices or alter their mix of drugs or change their
    forms or whatever, if that is going to get them bigger
    reimbursement. So that is one thing to keep in mind.
        Then the second thing to keep in mind is just the research
    and development consequences. If we cut by half our spending on
    pharmaceuticals, then, you know, that's going to help us today,
    but it has consequences for future generations because we have
    privately funded R&D. And unless we're willing to think of some
    other way to do R&D, I think we have to make sure there is some
    money to be earned for somebody who develops a novel therapy.
        Mr. Davis of Virginia. Of course.
        Mr. Schondelmeyer. Earlier, you asked all three of us to
    respond to the question, are we surprised that 40 percent
    expenditure increase occurred in the first 4 years. That is
    expenditure increase, not price increase; and the number of
    recipients increased in that time and a number of other factors
    unrelated to price.
        Also I point out, you ask, do price controls result in
    lower prices or higher prices over time. I would point out, the
    other major governments around the world that do have price
    controls--I'm not saying we have to do that--but do have price
    controls, do pay lower prices than we do. So price controls for
    many markets in many governments seem to work.
        The last thing I'd point out is, the United States--today,
    our government pays for 50 to 60 percent of all drugs in the
    United States. We have become the largest buyer in the
    marketplace. Whether you act as a regulator of price or a
    prudent buyer in the marketplace, you're going to have an
    impact in the marketplace. But I would say our government is
    not working as a prudent buyer in a market--in a marketplace.
    And there are behaviors that they can undertake that do
    facilitate markets, but use the power of a 50-to-60 percent
    player in a marketplace.
        Mr. Davis of Virginia. Governments are rarely prudent
    buyers is my observation.
        Mr. Schondelmeyer. You guys can change that.
        Mr. Davis of Virginia. I don't think you want Congress to
    get involved.
        Chairman Waxman. Thank you, Mr. Davis.
        Mr. Cummings.
        Mr. Cummings. I have sat here and I have listened to all of
    you; and I have to tell you, I'm confused. Because the bottom
    line, Dr. Anderson and Dr. Schondelmeyer, as I understand it,
    is that the government is spending more money now, in moving
    these folks to Medicare Part D, than they were before. Is that
    the bottom line?
        Mr. Anderson. That's $2 billion more per year.
        Mr. Schondelmeyer. True.
        Mr. Cummings. OK.
        Now, maybe I'm missing something, but Mr. Davis, whom I
    have tremendous admiration for, talked about ``deja vu, here we
    go again.'' But the fact is that Americans, hardworking
    taxpayers that are watching this right now, are probably
    sitting there scratching their heads and saying, OK, what does
    all this mean?
        Now, Dr. Morton has given us a few suggestions. And as I
    sat here and I listened to the suggestions, this is what I
    asked myself. I asked myself, what is the problem with her
    suggestions? And I want you all to answer.
        One of the things she says, we should move the folks that
    are now on Medicare Part D--correct me if I'm wrong--back to
    Medicaid. Is that right?
        Ms. Morton. Just the duals. I mean, my understanding is,
    Mr. Waxman's concern is just the duals.
        Mr. Cummings. So that we won't be confused and the public
    won't be confused--see, what happens here in Washington is,
    people talk past each other, and so then--but when the bottom-
    line clears, we are still in the same predicament. And we'll be
    in the same predicament 10 years from now, but it will be far
    worse.
        Is there something wrong with what she said? Is there an
    issue with that?
        Mr. Anderson. Well, I think you could do that. The problem
    is that you want to have one program really be in charge for
    the person's health care, and that should be through the
    Medicare program or the Medicaid program. And by putting--in
    the past, they have been separate, so drugs have been part of
    the Medicaid program, and lots of other things have been part
    of the Medicare program; and that makes it much more difficult
    to get good, quality care.
        So there are pricing reasons why you should follow her
    ideas, but there are clinical reasons why you might not want
    to.
        Ms. Morton. Now, can I say, the clinical side is not
    represented so well by our current system of a PDP and then a
    set of doctors who aren't part of the same organization.
        I agree with you, but I think we could fix it for
    everybody.
        Mr. Anderson. We should fix this for everybody, and
    essentially, potentially having separate payment systems makes
    it more difficult to solve it, because you want to have one
    system, one insurer really being responsible for the care of an
    individual.
        Mr. Schondelmeyer. I agree that could work, to shift them
    back to Medicaid; but a downside of that is, markets work also
    based on the principle of volume, and larger volume should get
    lower price.
        But here we have the government paying 50 to 60 percent of
    the drugs on the market, and paying a higher price and moving
    the dual eligibles from Medicare Part D back to Medicaid means
    that the government is dividing up their pie again to lots of
    smaller pieces, and essentially Medicare Part D does that.
    Instead of the government saying, we're going to pay for all
    Medicare Part D under one pricing system, we're going to let
    each plan and hundreds of these plans across the country
    negotiate prices. So we want a whole bunch of small people
    negotiating instead of one big party negotiating. So we
    structurally built into Medicare Part D principles that fight
    against markets working well in ways that do derive better
    prices in the marketplace.
        So we need to ask, should we keep them in Medicare Part D
    and find ways to better use the government's role in the
    marketplace.
        Mr. Cummings. Dr. Morton, I'm running out of time. What was
    your second most powerful suggestion?
        Ms. Morton. I think that we need to study the protected
    classes quite carefully. I think what Mr. Waxman said about how
    these are vulnerable populations that are very sick and need
    access to correct drugs is absolutely right. However, when you
    give the plans no tools to shift market share or weak tools,
    then you are going to have expensive prices.
        Mr. Cummings. Dr. Anderson, would you react to that,
    please?
        Mr. Anderson. Sure.
        Essentially what we did when we passed OBRA 1990 was, we
    said everybody in the Medicaid program had--for all the drugs,
    and so essentially you took out the ability to do formularies.
    But then you gave them the ability to do rebates.
        So essentially what you'd want to do in these protected
    classes is to institute either the best price or the rebate
    system, so that when there is no competition, the Federal
    Government or the dual eligibles get the best prices.
        Mr. Cummings. Thank you, Mr. Chairman.
        Chairman Waxman. Mr. Marchant.
        Mr. Marchant. Thank you, Mr. Chairman.
        Dr. Morton, in your testimony, you explained that expanding
    Medicaid, the Medicaid best-price requirement, to Part D would
    make prices more uniform across the board. Dr. Anderson seems
    to advocate uniform prices.
        What would be the implication of a uniform prescription
    price policy?
        Ms. Morton. The implications are twofold. One is that
    because the production cost of these drugs is quite low
    relative to the research and development costs, it is worth
    giving them--it is worth selling at low prices to people who
    are poor or who can't pay, because you're still covering your
    manufacturing costs and you're extending the benefit of the
    drugs to those people. If you have to charge a uniform price to
    everybody, then those people can't afford it, they don't buy
    and you don't get as many people being helped. So it is useful
    to be able to sell at different prices to different consumers.
        Second, plans--PBMs and insurers and HMOs--in this country
    have invested a lot in changing their organizations to be able
    to shift market share from one molecule to another, and that
    requires education of doctors and a lot of organizational
    effort. And that ability to shift market shares is what drives
    prices down, because it creates price competition between
    drugs. I buy A and you buy B. A and B compete. I get a good
    price on B; that is why I bought it. You get a good price on A;
    that is why you bought it.
        So your price on A is low and mine is high because we've
    engaged in this kind of bargaining. And if you make everything
    uniform, then all of that system of extracting price
    concessions is no longer worth doing.
        Mr. Marchant. Thank you.
        Dr. Anderson, you seemed to express surprise that Part D
    prices are higher than Medicaid. Does any other payer in the
    United States get Medicaid prices?
        Mr. Anderson. Sure. The VA actually gets lower prices, DOD
    gets lower prices than Medicaid does in most cases.
        Mr. Marchant. Does GM get Medicaid prices despite their--
    the fact that they are a very large purchaser?
        Mr. Anderson. I haven't--I don't have access to it. That's
    where we need price transparency to know whether or not GM gets
    the same prices at Medicaid. We don't, as researchers, have
    access. My guess is that they do not, which is what I'm
    concerned about, that the marketplace for drugs does not seem
    to be working.
        All the discussion that Fiona Scott Morton talks about in
    terms of the marketplace is resulting in the private sector
    paying 20 percent more than the public sector. And why would I
    want to emulate a system where you're paying 20 percent more?
        Mr. Marchant. Well, it seems to me that someone in their
    20's or 30, that had a disease that they felt like there was a
    time horizon available to them for that disease or that--to be
    cured with some kind of a medicine, would hope that the drug
    companies would not just flatten their product line to a price
    point, but would build something into the product line for
    profit and R&D, so that there would be some hope later. And, of
    course, the government would have that hope, too.
        Mr. Anderson. And I would share in that hope. Right now,
    however, the pharmaceutical industry is spending anywhere from
    14 to 18 percent of its revenues on R&D. It is spending 30
    percent on marketing and spending 25 percent on profits.
        So I would love them to increase the percentage--certainly
    as a researcher, certainly as a professor at Johns Hopkins--to
    increase them from 14 percent to 20 percent or 25 percent. But
    that is not what has happened, and as the profits have
    increased, the percentage has remained absolutely stable.
        Mr. Marchant. Ms. Morton, do you see a danger in that
    theory?
        Ms. Morton. The marketing expenses of a pharmaceutical firm
    are all driven toward getting more revenue, which--and those
    expenses wouldn't be spent if they weren't worthwhile in
    bringing in more revenue, so that increases the incentive to
    invent something. The more revenue you can collect from it,
    then the more incentive you have to invent it.
        So the marketing, per se, is not a disaster. Profitability
    is very difficult to calculate here because the percent profit
    has to be calculated on something--percent of sale, percent of
    assets, percent of whatever--and typically we would do it as
    percent of assets. And R&D is an asset for these firms, but it
    is not counted as such when the accountants look at assets. So
    pharmaceutical companies look like they have tiny assets and
    few factories when, in fact, they spend millions on R&D.
        So I'm just always leery of profit numbers, because they
    can--you can calculate them so many different ways.
        Mr. Marchant. Thank you, Mr. Chairman.
        Chairman Waxman. Mr. Yarmuth.
        Mr. Yarmuth. Thank you, Mr. Chairman. I want to thank all
    the witnesses for their testimony.
        I think we are in general agreement that the treatment of
    dual eligibles through Medicare Part D is costing the
    government and the taxpayers more money than it otherwise
    would. And the staff report estimates that the savings to the
    taxpayer down the road, or the additional cost to the taxpayer
    for failure to do something different, would be in the
    neighborhood of $85 billion over that 10-year period.
        Dr. Schondelmeyer and Dr. Anderson, does that seem like a
    reasonable estimate to you? Is that possible? Is that
    understating it?
        Mr. Schondelmeyer. I think if the program continues as
    designed, that is a reasonable estimate. But I would point out
    that it is probably even more than that because the States have
    gained even more in their supplemental rebates in the last year
    or two, and I think the savings could be even greater than what
    that represents.
        So it is probably a reasonably accurate estimate if not an
    underestimate.
        Mr. Anderson. And I would agree.
        Mr. Yarmuth. And it is possible, because the States have
    the protection of the inflation cap, essentially, it could be
    more than that in terms of savings if the inflation rate ended
    up being significantly higher as it has been in many years.
        Mr. Anderson. I think in OBRA 1990, that was a very smart
    thing to include in there, to put it in, because when the drug
    companies increase the prices, then essentially the Medicaid
    programs gets the advantage of that. And that doesn't exist in
    Medicare Part D.
        Mr. Yarmuth. Dr. Morton, you said in your testimony that
    the result of the study, the staff study, the staff report was
    predictable given what we're talking about.
        Would you say that the impact that we've seen over the last
    few years was predictable when the legislation was passed to
    create Medicare Part D?
        Ms. Morton. Certainly, the magnitude, I wouldn't have
    wanted to speculate on. But the fact that Medicaid has a
    required best-price provision for brands and then the inflation
    component on top of that makes me think that it would be
    extremely difficult for a private sector--I mean, it would be
    impossible if the Part D plans were included in the best-price
    provision.
        But actually they are exempted, so you could give Part D a
    low price, and it wouldn't trigger a Medicaid rebate.
        But having said that, I still think it would be very
    difficult to match the Medicaid price.
        Mr. Cummings [presiding]. Mr. Bilbray.
        Mr. Bilbray. Mr. Chairman, with your condolence--I mean,
    your support, I'd like to yield my time to the ranking member.
        Mr. Davis of Virginia. He is always happy to give you his
    condolences.
        Dr. Schondelmeyer, let me ask you. Prior to 2006, dual-
    eligible seniors who qualify for both Medicare and Medicaid had
    prescription drug coverage through Medicaid. Of course, now
    they're moved into the Part D.
        The majority report argues that by moving dual-eligible
    seniors from Medicaid price controls to Part D market prices,
    prescription drug companies receive a financial windfall.
        Do you disagree with CBO's assessment that mandating
    Medicaid price controls in Part D would increase the cost of
    drugs to all other private payers?
        Mr. Schondelmeyer. I haven't looked recently at CBO's
    assessment or quantification of that.
        I would point out that the Medicaid rebate is partly based
    on the best price, which comes from a price negotiated in the
    marketplace. And it means that there are at least one----
        Mr. Davis of Virginia. The total marketplace or a
    restricted marketplace?
        Mr. Schondelmeyer. In various buyers in the private
    marketplace.
        So there is at least one other buyer in the marketplace
    that is smaller than Medicaid and smaller than Part D plans
    that have negotiated a better price. And I find it
    contradictory that the larger Part D plans can't negotiate
    similar prices in the private marketplace that the best-price
    buyer--so I would argue that not all of the prices are
    regulated.
        I would give you that the mandated rebate amounts are set
    by government law or regulated, but any rebate above and beyond
    that is affected by the best price of negotiations in the
    marketplace.
        Mr. Davis of Virginia. Dr. Scott Morton, let me just ask
    you. You have to look at the marketplace as a whole; isn't that
    right? When you are cutting in one place, don't costs somehow
    rise--the drug companies, or whoever, in their marketplace are
    going to make allowances for that?
        Ms. Morton. Yes.
        I think we have a problem in our country because, for our
    government purchases, we tend not to like to say we will pay
    $2.43 for that pill. We like to say we are going to pay as much
    as the private sector pays, or 15 percent less than the private
    sector, or we are going to pay as much as Canada pays.
        And then the problem for all those sorts of reference
    prices is that industry then would like--if they can move the
    reference price, they can shift how much Medicaid and Medicare
    pay for their drugs.
        So if we say ``average prices,'' then the private sector
    prices are going to go up, because that is what triggers----
        Mr. Davis of Virginia. It is kind of like everybody taking
    the lowest seat price on the airplane. If everybody paid the
    lowest price that somebody pays on an airplane, they would be
    in worse shape than they are.
        Ms. Morton. They would raise the lowest price. That lowest
    price price wouldn't be where it was before.
        Mr. Davis of Virginia. And that is basically the argument
    here, as I understand. It is economics that I took.
        Mr. Anderson. But I am not sure why the Federal Government
    should pay the highest price.
        Mr. Davis of Virginia. Well, they don't in many cases.
        Mr. Anderson. They don't. But essentially----
        Mr. Davis of Virginia. Dr. Morton, do you think the
    government is paying the highest prices?
        They don't pay the highest prices. In fact, Medicare, Part
    D, the increases are way below what was initially estimated as
    we bring some marketplace into health care. One of the problems
    today is the Federal Government is such a large buyer, you
    don't have basically a market in some of these places.
        Dr. Morton, would you react to that?
        Ms. Morton. I think you said it correctly before, Gerry,
    when you said that Medicaid pays the lowest and then Medicare
    and then the private sector. So I think the private sector is
    paying the highest prices, and the danger of having a best-
    price provision that extends to a large group of consumers is
    that those prices go up.
        Mr. Davis of Virginia. So are senior taxpayers paying
    unfairly high prices for prescription drugs in Part D?
        Ms. Morton. I think--since I am an economist, I am not
    going to comment on the ``unfair'' part. I think my own
    research shows there is a huge benefit to moving the cash-
    paying uninsured into a plan, OK, because then you have someone
    larger working on your behalf.
        Mr. Davis of Virginia. They are the ones that took the
    brunt of it, aren't they, before this?
        Ms. Morton. Our data show that is a big effect. Moving into
    a plan, having been uninsured, means you get access to much
    better prices, and of course, your utilization goes up.
        Mr. Davis of Virginia. You would agree with that, wouldn't
    you, that the biggest beneficiaries of this are the uninsured,
    the poor, in terms of moving them into Part D, that they get a
    great reduction?
        Mr. Anderson. Oh, absolutely, the same thing as, we should
    try to cover the uninsured in the United States. I mean, we
    want to cover as many people as possible. So absolutely you
    want to do that; you just don't want to pay more than you need
    to pay for services. And I think that is what this committee's
    report shows, that you are paying too much for services. And $2
    billion is $2 billion.
        Mr. Davis of Virginia. Are they saying too much, or are
    they saying they are not paying what Medicaid pays, which is
    clearly the lowest? I think there is a difference between ``too
    much'' versus what Medicaid pays.
        If you argue that everything over Medicaid prices is too
    much and you put Medicaid prices across the board, it couldn't
    happen, could it, economically? Wouldn't it raise Medicaid
    prices?
        Mr. Anderson. I don't think it would raise Medicaid prices.
        Mr. Davis of Virginia. So if you think the drug companies,
    across the board, charged everybody at Medicaid rates, that
    life would just go on and there would be no ramifications
    throughout the system?
        If that is your opinion, that is fine.
        Mr. Anderson. They still would be paying more, the United
    States would still be paying more than Canada would be paying.
    You would have to bring the rates down to VA in ordered to get
    down to Canada or U.K. or French rates.
        Mr. Davis of Virginia. One thing we have with the U.K. is
    you do not have--and a lot of veterans have complained about
    this--you don't have the choices in VA because not everybody is
    bring their costs down to those levels.
        They can't afford to sell their drugs at that level, isn't
    that correct?
        Mr. Anderson. Well, they essentially have a formulary, and
    within a therapeutic class they will have a one-drug, which is
    exactly the same thing that the Part D plans have; they don't
    offer every drug. It is Medicaid that offers every drug.
        Mr. Davis of Virginia. I have one more question.
        Dr. Scott, when proponents of a national formulary are
    confronted with the counterargument that a structure would
    limit seniors' ability to get drugs, their response is often
    that seniors can just appeal the decision.
        I would ask, are the lower prices on formularies only
    achieved by the ability to move market share?
        Ms. Morton. My understanding is, that is the main reason
    why you get a low price, that you can promise to move market
    share. And if you are a senior and you look at PlanFinder, for
    example, in the Part D context, you can see which plans have a
    preferred--have a good price on the drug you are interested in.
    If it is A versus B, you can see that, and then you can join
    the plan that has the low price on the one you want.
        Mr. Davis of Virginia. On the one you want, you get more
    choice. Thanks.
        Mr. Cummings. Mr. Sarbanes.
        Mr. Sarbanes. Thank you, Mr. Chairman.
        Whenever we have a hearing on the pharmaceutical industry
    or drug pricing, I feel like I am in a magic show because it is
    all sleight of hand. I mean, it is incredible, the questions.
        When you say, well, if the price is this much higher than
    you would get in another way, isn't it really lower because of
    X, Y and Z? I mean, people see that the prices are higher. The
    report makes it clear that we have spent $2 billion or $3
    billion more as taxpayers than we needed to.
        By the way, yesterday we were considering trying to get
    full funding for the LIHEAP program, which is the Low Income
    Home Energy Assistance Program. The cost of that is about $2
    billion to $3 billion. Just so people understand, when you lose
    that much money that the taxpayers have put forward, you can't
    do other things that we ought to be doing to help people.
        To me, this is a classic case of, if it's not broken, why
    would you fix it? Not only is it a chief criticism of the
    Medicare Part D program that you didn't take advantage of the
    opportunity to create a beneficiary pool that could negotiate
    in a significant way with the pharmaceutical industry directly,
    but in fact with the dual eligibles, what you did was, you took
    6 million people out of a pool that was in a position to
    negotiate directly with the pharmaceutical industry and you put
    them into a place where they couldn't.
        Not only that, you took a system where you had PhRMA on
    this side, the pharmaceutical industry on this side, the
    beneficiaries on the other side, and you interposed the
    insurance companies and the insurance plans and insurance
    industry in the middle, which is notoriously inefficient in
    terms of its administrative costs.
        So you took a situation where you were paying 3 to 5
    percent overhead administrative costs through the Medicaid
    program; you put in the middle of the stream, the dollar
    stream, a system that has overhead costs of about 17 to 20
    percent, right--which is very inefficient--which is a great
    result for both the pharmaceutical companies who now get all
    this interference run between them on the pricing, right, so
    you can hide the ball very easily, and it is good for the
    insurance companies, who get to come in here and charge these
    huge overhead costs.
        It is absolutely madness.
        So my first question is, what was the reasoning? What
    possible rationale was offered up to justify taking the dual
    eligibles and moving them from Medicaid as the payer to
    Medicare as the payer?
        Mr. Anderson. Well, I think it was, as I explained to Mr.
    Cummings, that essentially you wanted to have them in one
    system, and that would be the Medicare system as being the
    controlling system for insurance. And what it meant,
    unfortunately, is a $2 billion windfall to the pharmaceutical
    companies.
        Mr. Sarbanes. That is a neat idea to get them into one
    system, but you could move them into one system that works or
    you can move them into one system that doesn't work. So what
    they did was, they moved them into one system that they made
    sure wasn't going to work by setting them up in a way that we
    couldn't negotiate.
        Mr. Anderson. Well, essentially, you put them into a system
    with 20 percent higher administrative costs and paying 20
    percent higher prices, and then trying to say ``provide good
    care.'' And that is really hard, because you are down at 40
    percent already.
        Mr. Sarbanes. Isn't central to this the fact that the
    Medicare Part D program is not a directly administered program?
    You have Medicare Part A, which is directly administered for
    hospital benefits. You have Medicare Part B, which is directly
    administered for physician services. You have Part C, which is
    a managed care program, which isn't working so well.
        But Part D was not designed that way. Part D is not
    directly administered. Part D is a subsidy to the commercial
    industry, which has all of these inefficiencies in it. So why
    you would want to set it up that way, who can imagine?
        Now, on the price control thing, we keep talking about
    price controls, but you put it better. This is really just
    about a customer called the U.S. Government that goes into the
    marketplace and has a lot of bargaining power, presumably.
        Do people have to sell? Do insurance plans that provide
    drugs and prescription drugs, do they have to sell to the
    government, are they required to sell to the government? Or do
    they want to sell to them because it is a big pool of
    beneficiaries that they can make money on?
        Mr. Schondelmeyer. They don't have to sell to the
    government. And I would point out, when we talk about using
    market share movement under State supplemental rebates or VA,
    we call it ``price controls.'' When we talk about using market
    share movement under Part D private plans, we call it ``the
    market.'' It is the same mechanism.
        So you can't call VA's--VA gets a lower price largely
    because it is a closed system and a very tightly controlled
    market share movement formulary, and that works. And Medicaid
    did that because they could do that much better than the Part D
    plans are right now.
        Mr. Sarbanes. If we are going to pray at the altar of
    market economics, we ought to at least bring the basic
    principles of how you negotiate in the market to the table,
    right?
        Thank you.
        Mr. Cummings. Mr. Issa.
        Mr. Issa. Thank you, Mr. Chairman.
        Market distortion is a serious concern, and I think for all
    three of you, you have been trying to deal with it--perhaps in
    different ways.
        Because, Dr. Morton, none of you are here to make a
    political statements, I will make a short, simple one to open
    this up. I come from California, where we mandate prevailing
    wage. I come to Congress where we vote back and forth and
    debate and argue, over partisan lines, prevailing wage.
        Now, prevailing wage, in at least this Congressman's
    opinion, is distorted, so we pay a lot more to build our
    homes--not our homes, but our schools and our roads, at least
    in California, than we would pay if the large buyer, this $150
    billion entity called California, went out and went to the low
    bidder and said, you know, You don't have to pay higher wages
    to build roads just to please the State of California. So I
    want to be sensitive here that we don't send that message from
    the government.
        Dr. Morton, I will start with you. VA is a buyer-seller, we
    want a good price, and we may not buy every drug if it isn't
    the best price, or we may not dispense two competing drugs as
    often, if it is more expensive. Would you say that was, as an
    buyer, as a government buyer, a fair market relationship as an
    economist?
        Ms. Morton. Yes, I think it is, and I think it is something
    that most Americans think that they don't want, that they would
    like something better than that, because it is a very tight
    formulary.
        Also, there is no retail component. So the VA pulls its
    truck up to the factory, gets the drugs and brings them to VA
    hospitals. You can't go down to your local pharmacy and get a
    VA-dispensed drug.
        Mr. Issa. Dr. Morton, I happen to have Indian health care
    in my district, quite a bit of it, and they get that rate, and
    they are thrilled to get it. And my centers, my Native
    Americans, take advantage of it. And by the way, they also
    look, in some cases, to buy outside those formularies, and they
    pay a lot more, but they do it with discretion because of the
    obvious price advantages.
        When we are looking at Medicare Part D, as we are here
    today, is it fair to say from a pure economic standpoint that
    if you take VA's advantage of single buying, low
    administration, back-up-the-truck-to-the-dock, that in fact
    you're going to spend more when you offer people individual,
    broad formulary choices and you add the administrative burden,
    that it is essentially where you are, not where we are? And
    have you ever calculated that cost?
        In other words, if we were to take--because I want to do a
    reality check on whether or not we are distorting and whether
    or not we are paying too much. If you take the VA rate and you
    take those elements, where should you end up as a hypothetical
    for Medicare Part D and where do you end up?
        Ms. Morton. That is a really good question. I haven't done
    that calculation, but that is exactly the right way to think
    about it. And part of what makes this difficult is that I know
    that there are some components; most of these Federal agencies
    have some component of mandated discounts and some component of
    ``we negotiated it because we have a tight formulary.'' And you
    would want to just look at the cases where it is negotiated, as
    opposed to mandated.
        Mr. Issa. Let me ask a question I think for all three of
    you, because this is of interest to me.
        Obviously, when we deal with seniors and we deal with drugs
    developed only for seniors in America, we are dealing under
    Medicare Part D, Medicare in general, that is the market.
        So my question is, how does the U.S. Government, in each of
    your opinions, ensure that drugs which are geriatric in nature
    only are fairly priced if there is very little alternative way
    of buying it, other than our VA seniors? Except for that group
    for the most part, some of these things have no other market in
    the United States.
        So each of you, have you thought about how we get the fair
    interpretation? Because I am here today believing that I can't
    use Medicaid because it is a distorted market. I can use VA,
    but I have to add those costs that I mentioned with Dr. Morton.
    So if that is all true, when I have a drug that is limited in
    its reach. Other than seniors in VA and Native Americans, how
    do I fairly make sure that the price is achieved?
        Mr. Schondelmeyer. Actually, we have at least one drug that
    falls into the category you described. There is a drug called
    Epogen that 80 to 90 percent of the market is the government,
    and the government is the only payer. So there really is no
    such thing as a market-based price, because the government is
    the monopolistic buyer in that market; and the government does
    set and establish the payment rates for that drug, and they
    come up with the value of, here is what it is worth.
        I think Dr. Morton earlier said the government is afraid to
    say, here is what we will pay for a drug. But on the one hand,
    they do try to do that, but any time they do that, we call it
    ``control'' rather than ``market behavior.''
        I think we have to look for the line between price
    regulation and prudent market behavior for government. Let's
    focus on the prudent market behaviors and try to avoid the
    regulation that drives up the price. But I think you can do
    prudent buying as a large buyer government and keep some
    element of market in place.
        Mr. Anderson. We have done that. Just to explain in a
    little more in detail, for SRD and renal disease drugs, I think
    we have gotten good value for those, and we have essentially
    with a government-administered price.
        The other thing, Mr. Issa, I would suggest, is the United
    States is not the only place where there are seniors. There are
    millions, billions of them around--a billion of them around the
    world, and pharmaceutical companies are not just selling to the
    United States, but they are selling to the U.K. and Canada and
    other places as well; and we have to recognize that.
        Mr. Issa. Dr. Morton, quickly.
        Ms. Morton. I would say, one of the things that you will
    get in Part D is this same substituting and bargaining, and I
    can shift share from A to B. So if your drug for seniors has
    substitutes, therapeutic substitutes, then I think you can
    trust to a PBM or a Part D plan to be able to extract discounts
    on that drug.
        I think the very difficult question, which we aren't facing
    at the moment so hugely, is what happens if somebody invents a
    pill that cures Alzheimer's, and it is the only one, or
    something like that? Then really the government becomes the
    only buyer, and there is no good substitute, and how are you
    ever going to get a discount in that circumstance?
        But as long as there are therapeutic substitutes, they buy
    like everybody else buys.
        Mr. Issa. Thank you, Mr. Chairman, for your indulgence.
    Hopefully the followup will be how government gets better if we
    are going to set prices. Obviously, it hasn't been one of our
    strengths, but I look forward to working with you on that.
        Chairman Waxman [presiding]. Thank you, Mr. Issa.
        Ms. Watson.
        Ms. Watson. Thank you very much, Mr. Chairman, for this
    hearing. I want the witnesses to know we value your input. I am
    concerned too about the real cost of these drugs and the
    increases, so--I have heard you allude to a way we should
    really model this. Can the three of you explain more how the
    government can model the Part D drug program so that it really
    works for seniors?
        A big smile there. What does that mean?
        Mr. Schondelmeyer. Well, first, the point that was brought
    up by Dr. Anderson: price transparency in the marketplace. The
    basic issue, that we don't see how much rebates are flowing
    without having a congressional investigation in the Part D
    program, to me, tells us that is not a market. We are going to
    hide behind the black box and do what we want, and you guys pay
    the bills.
        So we need to have price transparency and transparency of
    the flow of dollars in this marketplace. Markets work with
    information. When you hide information, markets cease to work
    properly. So one is that price transparency.
        Second, I think, look to the Medicaid programs and
    especially what States are doing in their State supplemental
    rebates and obtaining these much larger discounts above the
    already-mandated Federal Medicaid rebate and say, How can you
    use those mechanisms or apply those to the Medicare Part D
    plans; and ask why--the Part D plans, why aren't you
    negotiating the same kind of rebate? If this is a market, why
    can't you get the same level of rebate out there?
        And then look to see, are there reasons, maybe reverse,
    perverse incentives, that keep these Part D plans from wanting
    to get more rebates from the drug companies.
        I would argue that no one in America is really managing or
    regulating prices very well, whether it is government regulated
    or private regulated. What we do is, we get bigger discounts
    and rebates, but the top keeps floating up faster than
    inflation by a factor of two to three times the inflation rate,
    every year, year after year, no matter what we do.
        So prices keep going up no matter what we have done, and we
    fool ourselves into thinking getting more rebate dollars back
    is saving us money. It really isn't. It is not controlling the
    net we pay overall in the first place.
        Rebates are simply a loan to the drug companies for 9 to 12
    months, and then we collect the money back and spend a lot in
    administrative costs doing so.
        Mr. Anderson. I think if are going to have a marketplace,
    we have to have price transparency. We don't have price
    transparency in the pharmaceutical market, whereas we are
    pushing it in the physician market, we are pushing it in the
    hospital market.
        But I am not sure that we can ever get good prices when we
    have given the drug companies substantial reasons not to
    negotiate prices, and that would be the patents that we have
    given them for up to 17 years. This essentially takes away
    their reason for negotiation.
        So I think what we have to do is take a look at what other
    countries are doing in this area. They are paying about half
    the prices that we are paying for pharmaceuticals, in other
    countries, and that is why Americans are going to Canada and
    other places for these things. So one of the things the
    Medicare program could do--and I know many of you voted on this
    a year ago--is to have the Medicare program negotiate directly
    with the pharmaceutical industry in order to get a best price.
        The other thing that I would just add to that is, I am not
    sure why the VA, the Medicare program, the prisons and all the
    other places don't negotiate. I don't understand why the
    government pays different prices for exactly the same drugs,
    depending on whether it is a prisoner who needs it or somebody
    who is part of the community health center or somebody who is
    the Medicaid recipient.
        The government should be paying one price for drugs.
        Ms. Morton. I am a little less enthusiastic about
    transparency than my colleagues, because I think in the context
    of Medicare Part D, if I am a plan and I am negotiating hard in
    a particular class and I get a good deal on drug A, I don't
    really want to publish that for all my competing plans to see.
    And they might in fact be negotiating on drug B and drug C. So
    there is going to be differences across us, and the plans are
    going to be trying to get that lowest price as a way to lower
    their costs and attract more seniors.
        So requiring manufacturers to publish that price is going
    to lead the manufacturers to be less willing to give those
    discounts and less willing to price aggressively. So I worry
    about transparency.
        Second, I completely agree with Dr. Schondelmeyer in terms
    of the supplemental rebates the States are getting through
    Medicaid being a good model, but that actually is what Part D
    is doing. They are negotiating those rebates based on preferred
    drugs on a formulary. And what they can't do, which Medicaid
    can do, is get a best price or an inflation component, which
    are big parts of the discount that Medicaid gets.
        Then, last, I would say--Dr. Schondelmeyer said, why can't
    Part D do some of these supplemental rebates, negotiate for
    lower prices? Part of the reason Part D can't is because there
    are protected classes, and in these protected classes, the plan
    is restricted from making a drug preferred and saying, You have
    to consume this HIV drug instead of that other one until there
    is a medical need for you to switch. And when you have that
    kind of restriction, then it is not possible for the plan to
    negotiate aggressively and get a discount.
        Now, there are good reasons for having those restrictions,
    but I am just saying those restrictions are expensive.
        Mr. Schondelmeyer. That is exactly when government needs to
    step in, is when you have on the one hand, the market should
    work by negotiating lower prices and preferring one drug over
    another, but on the other hand, it is clinically not
    appropriate.
        Government has a role in that, and that is why you are
    here, and you do have a role in establishing a mechanism to
    deal with something the market can't do effectively.
        Chairman Waxman. Thank you very much, Ms. Watson.
        Mr. Shays.
        Mr. Shays. Thank you, Mr. Chairman, for having this
    hearing.
        I am struck by the fact that Medicare Part D is about $40
    billion and Medicare Part A is about $220 billion; and we want
    to save money, but we are having a hearing on the Medicare Part
    D program. I think we should, and I think we should because I
    think it has worked, frankly, phenomenally well.
        For years, politicians talked about having a prescription
    drug program, and in 2003 a Republican Congress, believe it or
    not, passes a prescription drug program. The program they
    wanted was going to cost about $400 billion over a certain
    period of time, and the Democratic program was going to cost
    $800 billion. I chose the less expensive plan because I thought
    it would cost twice as much when we finally adopted it, because
    most programs that we pass under Medicare turn out to be twice
    as much as the estimate.
        And, believe it or not, it is like one-third less than it
    was going to be, not twice as much.
        Dr. Anderson, when you come in with a beaming face as
    though you have made this great discovery that those products
    that are controlled may be less expensive, I say, Whoopie, you
    are exactly right.
        I would like to make a proposal. Do you ever get any
    Federal grants?
        Mr. Anderson. I do.
        Mr. Shays. I want to save the government money. How much do
    you get paid as a salary?
        Mr. Anderson. $175,000.
        Mr. Shays. I want you to only accept $50,000. I am going to
    tell you that is what you get for that grant. I want to save
    the Federal Government money. But we don't do that, because we
    want you to have your talents and we want you to have your
    creativity. But we don't control what you get, at least I don't
    think we do.
        We do it with doctors. That is not negotiation; that is,
    take it or leave it. They are underpaid; our doctors get less
    for the service than it costs them, but we act like somehow
    this is a great program because we have price controls.
        Tell me why I shouldn't be grateful that this program costs
    less than it was supposed to cost, that the seniors who are in
    it have 9 out of 10--excuse me, 85 percent satisfactory rate--
    and 9 out of 10 who are part of the dually eligible don't want
    to go back into the old system nor do the States want them to
    go back into the old system.
        Nobody wants to go back into the old system, But you are
    using that as a price comparison.
        Mr. Anderson. First of all, you said the $400 billion. If
    you look at Kerry Weems' testimony that he is going to give
    today and you add up the numbers of the expenditures that are
    projected, you will see it is $400 billion. So essentially you
    talk about a 30 percent reduction; but essentially when you
    voted on the bill, it was $400 billion----
        Mr. Shays. You are talking about a shifting 10-year
    timeframe. Let's talk about the same numbers we were using when
    we did it, compare apples to apples.
        Mr. Anderson. Right, I think that is what we have.
        Mr. Shays. Sir, you are not.
        Mr. Anderson. We will take a look at that.
        Mr. Shays. Dr. Morton, what is your comment?
        Ms. Morton. I just wanted to say that underlying all of
    this discussion, we should remember that pharmaceuticals are
    really unusual, because the research and development that was
    used to produce the drugs we are consuming today occurred 15 or
    20 years ago.
        So part of the problem is, if you say to a doctor, We are
    going to reduce your salary from $200,000 to $100,000, they can
    take it or they can drive a taxi. And if they go to drive a
    taxi, then we have no more doctors left. And that constrains
    what you do as a body for paying for physicians.
        Mr. Shays. I know how we can build twice as many bridges.
    We will just pay the construction workers half the price. But I
    don't believe in that, and I am for the prevailing wage. But
    here we have a competitive model that is working.
        Ms. Morton. I am sorry. I just want to say one thing.
        So the thing about the drugs is that if I say today, as
    Congress, I am going to pay half as much as I was paying
    yesterday, that drug is already invented. It costs a tiny
    amount to manufacture, so, of course, the drug company is going
    to sell it at half the price.
        Mr. Shays. Let me ask you about price controls. I went to
    California about 15 years ago, and a company was developing
    something to slow the beginning stages of Alzheimer's. They
    spent $800 million.
        I checked 2 years later, they had spent about $200 million
    more and it failed; they lost $1 billion. But they told me at
    the time they wouldn't have spent a darn penny if they had
    price controls.
        And it seems to me this is really a debate on whether we
    with we have price controls or not; that is what it is really
    about. And I don't buy into price controls. I think what we
    will have is less discovery. I think we won't have the drugs
    that we see today.
        And if you disagree, either one, tell me why.
        Mr. Schondelmeyer. First of all, your statement, or the
    framing of the issue, isn't exactly correct, because price
    controls were in effect. If you call Medicaid rebates pricing
    controls, then they were in effect and they did spend the
    money, and VA price controls were in effect and they did spend
    the money.
        So I find the statement that if price controls were in
    place, we wouldn't have spent the money to be a little bit
    specious of an argument, because there were price controls, by
    your definition.
        Mr. Shays. Excuse me, you don't believe that when we tell
    doctors, this is the payment, that is not a price control? Do
    you really think we negotiate with our doctors?
        Mr. Schondelmeyer. No, and the same with pharmacists and
    others in California. The States cut the fees.
        Mr. Shays. Do you think we negotiate with our doctors, or
    do you think we basically say, this is it?
        Mr. Schondelmeyer. No, it is take it or leave it.
        Mr. Shays. Yes, it is price controls.
        Mr. Schondelmeyer. But it is different. I would point out,
    there is not a best-price provision for doctors like there is
    in the Medicaid State rebate programs, and there are not State
    supplemental rebates like there are.
        So there are some aspects of this that are market based in
    terms of the prices Medicaid pays. It is not all just to fix,
    we will only pay this.
        Chairman Waxman. The gentleman's time has expired.
        Ms. Speier.
        Ms. Speier. Thank you, Mr. Chairman.
        This lively debate is interesting to me because I believe
    that California is a great example. The Medicaid system in
    California is one in which we have historically negotiated
    rebates and discounts in the Medicaid system, and they have
    been healthy discounts. And the pharmaceutical companies have
    flocked to California because it is a great universe from which
    to sell their product, and there has been great competition
    there.
        So, I guess my question is--and I would disagree a little
    bit with what my colleague has just said--if you look at how
    many dollars are actually spent on R&D, at least historically,
    the majority of those dollars have come from the taxpayers of
    this country and NIH grants, if I am not mistaken. So it is the
    government that funds the lion's share of this research that
    goes on.
        All the other industrialized countries in the world have
    price controls in effect, and we end up subsidizing the prices
    of pharmaceuticals in these other countries.
        So, I guess my question is, you have spoken a lot about
    transparency. But in trying to identify which is more
    important, just lifting the language in the bill that was
    passed by Congress, it says that the Federal Government can't
    negotiate.
        Isn't that the most important thing we can do in terms of
    trying to bring the costs of these drugs down?
        Mr. Anderson. I think it is, in fact, the most important
    thing, and I would strongly support that as an idea. I mean, it
    is very close to what the other countries are doing, as you
    suggest; and I don't understand why we want to be spending
    twice as much for drugs as other countries are spending.
        Mr. Schondelmeyer. Also, we can look at both the market and
    other things that have worked. State supplemental rebates are
    negotiated and operated by States on behalf of the entire
    Medicaid program within the State.
        Somebody earlier referred to General Motors or large
    corporations and their behaviors. I don't see General Motors
    turning over their drug benefit to each local plant and telling
    each local plant, you go out and negotiate drug prices on your
    own.
        Hey, centralize it and do it centrally.
        The equivalent of that in terms of Medicare would be for
    the Federal Government to use State supplemental rebate
    negotiation tactics on behalf of all Medicare Part D programs
    and then pass the benefit on to those local Part D plans out
    there.
        So we see in the private market centralized behavior, large
    prudent buyer behavior and using the market to work. And I
    think the government can do that and be a prudent buyer and not
    be a price regulator, per se.
        Ms. Morton. The problem I see with that is, if Health and
    Human Services negotiates directly with pharmaceutical
    companies, it depends on your interpretation of the word
    ``negotiate.''
        If you are going to say, I am a large buyer, I am the
    Secretary, I mandate you give me 20 percent less, of course,
    that is going to work. If you say, I would like you to give me
    20 percent less, then the question is, why?
        A regular plan says, I want you to give me 20 percent less
    because I am going to consume your competitor if you don't. I
    am going to consume drug A if you don't give me a price cut on
    drug B.
        The Secretary presumably wants to include all drugs,
    doesn't want to tell American seniors, you can only have drug A
    and you can't have drug B. So if the Secretary can't exclude
    somebody, then I don't quite understand how they negotiate a
    lower price. I understand how they instruct, you will give us a
    lower price.
        Ms. Speier. Well, California has a MediCal medical
    formulary, and drugs get on or off the formulary, and, you know
    what? They do make those decisions.
        Furthermore, these drug companies want to make sure their
    drug is on the formulary. So it is not like it is so much an
    exclusion as much as it is, we want to be on your formulary and
    we will give you this.
        Ms. Morton. Right.
        But California Medicaid is excluding some drugs, and the
    people in California Medicaid are getting this benefit for
    free, and they don't really have the ability to complain and
    say, ``I would like a choice of all cholesterol drugs,''
    whereas I think seniors and employed people expect to have more
    choice in their formulary or choice of cost plans.
        Ms. Speier. I have a mother on 15 drugs right now. She
    doesn't know which cholesterol-busting drug is the best. She is
    on three or four of them.
        So I think it is kind of--it doesn't make a lot of sense to
    say that these seniors want these drugs. They tend to want the
    drug that they have been on, as opposed to wanting some drug.
    And if we didn't have direct-to-consumer marketing, we would
    have a whole lot better system in this country to start off
    with.
        Mr. Scott Morton. So suppose you have a national formulary.
    They have been on drug A all the time; they arrive at Medicare,
    and the Secretary has negotiated a good price on B, and that is
    it. The question is, what does the person do at that point?
        That is a system we could have. That is what the Government
    of France does.
        Ms. Speier. You know what it is called? It is called prior
    authorization. We have done it in California, and it has
    worked. For that individual who does better on the drug that is
    no longer on the formulary, you can still have that drug, it
    just needs prior authorization.
        Frankly, that is what we should be doing on the Federal
    level. It is not like it hasn't already been done. It is done,
    it is done effectively, and it saves a lot of money.
        Ms. Morton. And Part D plans do that.
        Chairman Waxman. The gentlewoman's time has expired.
        Mr. Burton.
        Mr. Burton. My first wife, who died 6 years ago, was taking
    chemotherapy in Indianapolis. And there were two women sitting
    there next to her, they all had the needle in their arms taking
    their chemotherapy. And one of the women was saying--she was
    actually complaining because, she said, My Tamoxifen costs so
    much, I can't afford it; it is $325 a month.
        And the other lady said, I am getting mine for $50 a month.
        And she says, No, that can't be right. And I am sitting
    there as a legislator, and I said, No, that can't be right.
        And the lady said, No, I am getting it from Canada for with
    about one-sixth the cost of what it was in America.
        I held hearings on this when I was chairman of the
    committee, and I couldn't figure out why, right at the border
    between Canada and the United States, you can go across the
    border and get the same pharmaceutical product for one-fifth,
    one-fourth, one-third, one-half. So I started being supportive
    of a process called reimportation, and that was because I
    couldn't figure out why Americans should pay more for
    pharmaceutical products than people in other parts of the
    world.
        I found out, along with my colleagues, that in Spain,
    France, Germany, all over the world, the price is one-half,
    one-third, one-fourth, one-fifth or one-sixth of what it is in
    the United States.
        The argument was, well, in the United States we have to do
    research and development, we have to do advertising and all
    that other sort of thing.
        My problem is, why isn't the rest of the world paying for
    part of that? Why in the world should the American people have
    the burden of advertising, research and development and
    everything, and then pay five or six times what it costs for
    the same pharmaceutical product someplace else?
        So we supported the reimportation program. The
    pharmaceutical companies went to the FDA and started talking
    about purity and whether or not there could be tampering and
    all that sort of thing, and they, in effect, have been able to
    block reimportation. They have been very effective, so they can
    protect their margins here and protect their market share. I
    don't understand that, and I don't think anybody in America who
    really thinks about it understands that.
        We should not be paying more for pharmaceutical products
    than the rest of the world simply because, you know, we can
    afford the R&D, and we can afford that and load it on the back
    of the American people.
        So we passed the prescription drug benefit, and we
    guaranteed in there that there would be no control whatsoever
    by the Federal Government in the price of the pharmaceutical
    products that the government is going to be involved in. So
    they, once again, are able to block and say, It is going to
    cost a lot more here in America; and they have been successful
    in blocking pharmaceuticals from the rest of the world.
        We can, with the new technologies, guarantee that drugs
    coming in are the product that we say they are. We can
    encapsulate them in plastic. We can put microchips or those
    mini, very small chips in there, to make sure that the product
    is the same as it is here in the United States, to guarantee
    the purity and everything. And yet we can't do that. And we
    can't do that because the pharmaceutical industry wants to keep
    the prices at a certain level here while they are able to give
    discounts way, way down the line, much lower costs, in other
    parts of the world.
        I would like for somebody to explain to me why we can't
    have a process where the pharmaceutical companies can say, OK,
    since you in the United States are going to make sure you are
    going to get comparable prices, we are going to go out and
    negotiate or tell the other countries in the world we are not
    going to allow you to charge this much less.
        I sat down with the president of Eli Lilly, a company in my
    State. I sat down with people from Merck, vice presidents and
    presidents. And I said, why don't you come up to the Hill and
    sit down with us, Members of Congress, and let's try to
    negotiate some type of solution to this problem so Americans
    aren't burdened with a huge price while the rest of the world
    is getting off relatively scot-free. And they wouldn't do it.
        Rather than doing that, they had PhRMA, their organization
    here in Washington that has tons of lobbyists, some of whom I
    am sure are here today--they had PhRMA go to the FDA and say,
    Oh, my gosh, these pharmaceutical products coming in from the
    rest of the world may not be pure; they may be tampered with,
    while at the same time they knew full well there were
    mechanisms we could use to protect those products coming into
    the country.
        In addition, many of the products they are talking about
    are made in India and other parts of the world and coming in
    here in bulk anyhow--Viagra being one of them, which is used
    very widely here in the United States and, I understand in
    India, which really doesn't need it. It is only costing them
    about 10 or 12 cents a pill, whereas here, it is costing over
    $10.
        Anyhow, I would like for you to give me an answer to that
    problem. Why do Americans pay three, four, five, six times what
    they are paying in Canada and elsewhere? Why can't we do
    something about negotiating? And why do we pass a Medicare
    prescription drug benefit that protects the pharmaceutical
    companies from negotiation with our government? I mean, it just
    seems to me there ought to be a question of fairness here.
        I want the pharmaceutical industry to make a lot of money.
    I want them to be very profitable. I am for the free enterprise
    system. But while I say that, I say, why should Americans bear
    the burden of all this, while the rest of the world is, in
    effect, getting off scot-free?
        Thank you, Mr. Chairman, for giving me the time.
        Chairman Waxman. The gentleman's time has expired.
        We will give a short opportunity for an answer. I think you
    answered a question there.
        Ms. Morton. I have a short answer. So, one, I like the way
    you phrase the question, which is, Why doesn't everybody else
    pay more?
        I mean, we have two choices: One, there is too much R&D, we
    should pay less, pay the same as France, and we have a new
    industry that responds to that. Or we think the amount of R&D
    we want is good right now, or it should be more, in which case
    everybody else is free riding. They are as rich as we are, and
    they are not contributing to the cost of R&D.
        I think that is a very good question. Designing a
    regulation to get that to happen, I have some thoughts which I
    would be happy to share with you. But I think it is quite
    tricky.
        Mr. Anderson. Fourteen percent R&D, 30 percent marketing.
        Mr. Schondelmeyer. And they don't spend as much on
    marketing in other countries because their systems aren't as
    open.
        Others today have commented, if you do this, if you do
    that, it will raise prices in the rest of the market. But I
    would bet most of those people who made that comment weren't
    talking about prices in the rest of the world.
        I think we need to take actions and communicate to drug
    companies we expect them not only to look at raising prices in
    the rest of the U.S. market, but the rest of the world market;
    and they do need to look at other countries also to get back
    the money for R&D and to subsidize their development.
        I would also point out that the drug that was involved in
    many cancer drugs was actually discovered by the National
    Institutes of Health. One of the leading cancer companies that
    has more products I think on the market than any other company,
    the last time I looked, 3 or 4 years ago, had about 21 cancer
    drug entities. And how many of those had that company
    discovered in their own R&D? Zero. The largest company that
    sells cancer drugs, at least 3 or 4 years ago, hadn't
    discovered a one; they had come from Federal Government
    funding.
        Chairman Waxman. Thank you, Mr. Burton. Your time has
    expired.
        Mr. Tierney.
        Mr. Tierney. Thank you, Mr. Chairman.
        I am always amused when Mr. Burton and I come down on the
    same side of an issue here. I was sort of hoping that he had
    made that passionate plea to his caucus a few years back, and
    maybe we wouldn't be here discussing what we are discussing
    today.
        Look, I think the manufacturers have a hard time justifying
    the high prices. I think they have gotten a bit of a windfall
    out of it. But I know one of the arguments we are going to hear
    back is just what we are talking about right there, that if you
    do anything about this, research is going to stop and everybody
    is going to go to hell and die.
        So I really want to knock that out of the box right now. It
    is nonsense and foolishness, as far as I am concerned.
        They reported, what, about $90 billion of profits last
    year, up $20 billion previous to that, or whatever, and I don't
    for a moment think that a change in the price situation here is
    going to stop them from doing research.
        So let me start with Dr. Anderson, if you would. Would
    reducing the high prices that they are now charging on the Part
    D program have an impact on the industry's research and
    development?
        Mr. Anderson. It is hard to answer that one analytically,
    but I don't think so.
        Mr. Tierney. All right.
        Dr. Schondelmeyer, what do you think? Can we reduce Part D
    prices without adversely impact the research?
        Mr. Schondelmeyer. I think you can certainly go back to the
    Medicaid prices that you had and not affect research
    dramatically, because we were there and they were accepting
    those prices and they were living with that. So I think you can
    at least go back to that level, without a major effect on the
    market.
        Mr. Tierney. Dr. Morton, do you want to weigh in?
        Ms. Morton. I would more or less agree with that, although
    I will say that a lot of these entities are discovered by
    venture-capital-funded small firms that are then bought by the
    larger firms, and anybody who is in venture capital or that
    kind of finance is investing because they expect a return. So
    anytime you alter the return, that goes into the calculation of
    whether they are going to spend money in the biopharma area.
        So I don't think you can ever assume no effect. It is just,
    are we making a small shift of duals? Or are we making a big
    shift of everyone who's eligible for Medicare?
        Mr. Tierney. Thank you.
        Let me ask you--Dr. Schondelmeyer, you can start on this--
    what is the difference or what is the variation between how
    much research is done from government-funded projects versus
    what the industry does? And which drugs are involved, the more
    commonly used drugs or the less commonly used drugs, and all of
    that?
        Mr. Schondelmeyer. I haven't examined that systematically
    in recent years, but the evidence seems to suggest that drugs
    for categories that are most critical, such as cancer, tend to
    come more from government-funded research, and that drugs that
    come from the pharmaceutical companies tend to be more the
    lifestyle drugs, the drugs that--you know, feel good, live-
    well-type drugs, come from the drug companies that have broader
    populations.
        So the government tends to fund more critical, life-
    threatening drug discovery and drugs for smaller populations,
    while the drug companies tend to fund drugs for broader
    populations and maybe for more symptomatic or feel-good
    purposes.
        Mr. Tierney. We have all heard the expression of ``me too''
    drugs out there and the research on that. Do you want to
    comment on that a little bit?
        Mr. Schondelmeyer. Well, I would be careful. There is an
    issue of ``me too'' drugs; I think it is often misunderstood,
    too, though.
        I do think for a legitimate disease-state category, where
    there is three or four or five companies in the race to find a
    drug in that category, among those three, four or five, for
    whatever reason, whether it is regulatory or company
    performance, one of them is going to come out first.
        I wouldn't say that the other four or five that were
    legitimately in the race are ``me too'' drugs because they were
    in the race. And, in fact, those other drugs could--if our
    market works, which it doesn't work well--could create
    competition.
        Where ``me too's'' come in is when the company that first
    discovered it or other companies 15 years later come out with
    an extended release dosage form, a right-handed or left-handed
    molecule, those are ``me too'' drugs and those are kind of ways
    of extending patent pricing without adding a whole lot of value
    to the market in most cases.
        Mr. Anderson. The NIH would suggest that more money is
    actually being spent by PhRMA than by NIH right now. We would
    have to take a look in terms of what it is spending it on.
        NIH is much more basic research kinds of things. PhRMA is a
    lot more drug development kind of things. But I think overall,
    the numbers from NIH would suggest that PhRMA is spending a
    little more.
        Ms. Morton. I would second that.
        I mean, NIH doesn't do the testing. So you can invent a
    molecule, but then you have to show that it is safe in
    thousands and thousands of people and go through the FDA. All
    of that is actually quite expensive, and NIH doesn't do that.
        You can also see why the lifestyle drugs wouldn't be coming
    out of the government. I mean, I imagine the grant application
    to NIH for Viagra would not get funded.
        Mr. Tierney. You have more confidence than I do. I would
    hope you are right on that.
        Thank you, Mr. Chairman. I yield back.
        Chairman Waxman. Thank you, Mr. Tierney.
        Ms. Foxx.
        Ms. Foxx. Thank you, Mr. Chairman.
        I want to make one brief comment. As I have been sitting
    here, listening to the comments that you all have been making--
    and I've made this observation on a couple of other occasions--
    I grew up in the mountains of North Carolina in the late
    1940's, early 1950's, in the poorest county in North Carolina
    when I was growing up.
        My family was extraordinarily poor, yet we could afford
    health care. Everybody in our county could afford health care.
    In fact, I didn't know many people who had any kind of really
    big problems with health care. We had a hospital. We had
    doctors.
        And I have thought a lot about why it was that we could get
    health care in those days, and we have such a problem now with
    people, who are much better well off than we were, not getting
    health care.
        My observation is, it is two things: No. 1, government
    involvement, and I think any time you get the Federal
    Government involved in just about anything, you get more of a
    problem than you get a solution; and the other is third-party
    payer, when people are not in charge, I think you create
    problems.
        I would just say that as a statement, because when I hear
    people say, get the government more involved, the Federal
    Government, it is just like scraping a fingernail across a
    blackboard for me, because I think what you are doing is simply
    creating more problems.
        But I want to ask a question of Dr. Scott first, and then I
    have a general question.
        Do you think that pharmacy benefit managers are
    sophisticated negotiators on behalf of seniors? We have heard
    about the problems with getting prices. Tell me what you think
    about that.
        Ms. Morton. Yes, I think they are sophisticated
    negotiators. A lot of the Part D plans that have been most
    successful in the sense of being taken up by many people are
    run by quite large and sophisticated insurance companies.
        Ms. Foxx. Then the other question I have, my understanding
    is that under Medicare, some drugs are paid for by federally
    set prices. They are injectable drugs under Part B. I would ask
    each member of the panel--and I know we have a limited time--do
    we set the prices for those drugs well? What is the history of
    the Federal Government setting those prices? My understanding
    is that there is a mixed history there; sometimes we have done
    well, sometimes we have done poorly.
        Relate that to what you are recommending now. Those are the
    folks on the upper end of the panel who are recommending that
    primarily.
        Mr. Schondelmeyer. First, I would comment on, Are PBMs a
    sophisticated buyer? They are, but they don't have a fiduciary
    responsibility to act on behalf of the recipient. They act on
    behalf of their own stockholders and corporate entities, and
    those are different financial decisions that they make. So they
    are very sophisticated at taking care of themselves and meeting
    the requirements that are made of them for the recipients, but
    not acting in the best financial interest of the recipients.
        I would also bet that hospital you had in your area was
    government subsidized under the Phil Burton program----
        Ms. Foxx. No. Well, it may have gotten some, but it was
    primarily supported by the people who used it.
        Would you mind answering the question I asked you to
    answer?
        Mr. Schondelmeyer. Yes. And what was that question? Remind
    me.
        Mr. Anderson. Let me answer. I will get it.
        Basically, if you take a look the Medicare program, the
    seniors in 1964, only about half of them had health insurance
    after Medicare. The other half got----
        Ms. Foxx. You have just made my point.
        Mr. Anderson. I did? I thought you said that everybody had
    coverage.
        Ms. Foxx. I just said I think what created the problems
    with our not being able to get health care is third-party payer
    and the involvement of the government.
        Mr. Anderson. Well, I would disagree.
        Ms. Foxx. Do you mind answering the question I asked?
        Mr. Anderson. On the Part B thing, sure, essentially there
    was a problem with Part B drugs, that they were essentially
    giving serious discounts to doctors, but the Medicare program
    did not know those serious discounts, did not have price
    transparency, did not know that.
        Part of the Medicare Modernization Act of 2003, hopefully,
    with the average sales price, solved that problem, and now the
    discounts are less.
        So I think the Medicare program can learn and solve the
    problems.
        Ms. Foxx. What kind of learning curve is there for the
    people in the program?
        Mr. Schondelmeyer. Well, I would answer your first question
    about the ASP and the government buying.
        First of all, Medicare Part B is a very different market.
    It is primarily through physicians and a totally different
    distribution system, and there were incentives for doctors to
    actually prescribe more higher-priced drugs.
        I would argue, though, similar incentives are in place in
    the Medicare Part D program for the very reasons I stated.
    There is no fiduciary responsibility on behalf of PBMs, and
    they can make more money by negotiating rebates from drug
    companies, but not passing it on in lower costs to the
    recipients.
        So I think the problems we had and the learning curve we
    have hasn't really stuck in Medicare Part D.
        Chairman Waxman. Mrs. Foxx, your time has expired.
        Ms. Foxx. Thank you.
        I would like to say for Federal bureaucrats, there is no
    fiduciary responsibility either.
        Chairman Waxman. The last word.
        I want to thank the three of you very much for your
    participation. I think that all the members on the committee
    and all the people in the audience should get college credit
    for this discussion. It was a very high-level one, and I think
    a very worthwhile one. Certainly you have been helpful to us.
        Mr. Davis of Virginia. Let me just add to that and thank
    our panel. It has been very informative.
        Chairman Waxman. Our next witness is Mr. Kerry Weems. He is
    Acting Administrator for the Center for Medicare and Medicaid
    Services, Department of Health and Human Services. I would like
    to ask him to come forward.
        Before you even sit down, it is the policy of this
    committee that all witnesses testify under oath. So if you
    would please raise your hand.
        [Witness sworn.]
        Chairman Waxman. The record will show that the witness
    answered in the affirmative.
        We have your prepared statement and it will be part of the
    record in its entirety. What we would like to ask you to do is
    try to stay within 5 minutes for your oral presentation.
        I think you know the routine; it is green, 4 minutes;
    yellow for 1 minute, and when it is red, we would like you to
    certainly conclude.
        Thank you for being here.

      STATEMENT OF KERRY WEEMS, ACTING ADMINISTRATOR, CENTER FOR
     MEDICARE AND MEDICAID SERVICES, U.S. DEPARTMENT OF HEALTH AND
                             HUMAN SERVICES

        Mr. Weems. Thank you, Mr. Chairman, and thank you,
    distinguished members of the committee. It is a pleasure to
    appear before you today.
        The success of the Medicare prescription drug benefit
    provides strong evidence that competition through private plans
    has contributed significantly to lowering costs to both the
    government and beneficiaries. Through Part D, Medicare
    beneficiaries are extremely satisfied with their current
    prescription drug coverage and have been given meaningful
    choices for drug coverage at a cost much lower than originally
    estimated.
        Experience with Part D thus far demonstrates that
    competition is working for beneficiaries and taxpayers alike.
    According to the fiscal year 2009 President's budget, the
    necessary cost of the Medicare Part D program is 40 percent
    lower than the projections at the time the bill was passed, and
    beneficiaries are reaping these savings.
        Independent surveys have consistently shown that more than
    85 percent of Medicare beneficiaries and nearly 9 out of 10
    dual eligibles are satisfied with their Part D coverage. High
    satisfaction rates are directly related to the other successes
    in the Part D program, including meaningful and affordable
    choices, unprecedented information and transparency for
    beneficiaries, lower-than-projected costs from effective
    private sector negotiation, and increased generic utilization.
        With the overwhelming success and popularity of Medicare's
    Part D benefit, we should be vigilant against attempts to use
    government mechanisms to intervene in the market and move to
    administered government pricing.
        When Congress enacted Part D, the decision was made to move
    dual eligibles to Part D, which offered the dignity of choice
    and a market-based approach to the drug benefit structure and
    pricing. congressional research agencies like CBO and GAO
    widely agree that direct government negotiation of prescription
    drug pricing in Part D is unlikely to lead to lower costs. As
    the chart demonstrates, simply comparing Medicaid's rebates to
    Medicare does not capture all the other efficiencies and
    savings achieved through Part D by encouraged use of generic,
    lower-cost drugs, lower-cost sharing opportunities for
    copayments and coinsurance.
        What is more, through drug utilization management, Part D
    has improved health outcomes by reducing the possibility of
    adverse drug events.
        The record from implementation of mandatory price controls
    and rebates in Medicaid reveals that these price-setting
    policies have the potential to increase costs in the private
    sector and others not subject to the government-imposed price
    controls.
        CBO examined the implementation of the Medicaid drug
    rebates on the market and found that, while access to rebates
    lowered Medicaid's outpatient drug expenditures, spending on
    prescription drugs by non-Medicaid patients may have increased
    as a result of the Medicaid rebate program. Further, GAO found
    that in the first 2 years of the Medicaid drug pricing program,
    the average price for medicines purchased by HMOs and Group
    Purchasing Organizations increased.
        With Medicare beneficiaries accounting for nearly 40
    percent of prescription drug spending in the United States, it
    is not at all unreasonable to expect that a change from market
    pricing in Part D to a government-mandated rebate structure
    could have an even stronger ripple effect on the cost of
    prescription drugs for those not subject to government-imposed
    price controls.
        With a combination of more than 50 percent of the market
    subject to a statutorily dictated pricing structure, these two
    Federal programs could eliminate the potential rebates for any
    other purchasers. More specifically, it could lead to higher
    prices at the pharmacy, may compromise incentives to move
    enrollees toward low-cost therapeutic equivalents or generic
    drugs, or may undermine utilization management activities that
    the participating plans use for important safety protections as
    well as cost controls.
        The Part D Program has been successful beyond expectations
    even in its infancy. Beneficiaries have meaningful choices for
    drug coverage at a cost that is much lower than estimated; and,
    more importantly, they are satisfied with their coverage.
        Thank you for the opportunity to appear before you today. I
    look forward to your questions.
        Chairman Waxman. Thank you very much, Mr. Weems.
        [The prepared statement of Mr. Weems follows:]

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        Chairman Waxman. Without objection--I think we've discussed
    this with the minority--we want to do an initial 10 minutes on
    each side, 10 controlled by the Chair and 10 controlled by Mr.
    Davis. And without objection, that will be ordered.
        I want to start off my questions with you.
        Mr. Weems, we are here today because we want to know
    whether we can make the Part D program work better for the
    taxpayers. You testified that the program is highly successful.
    You told us that beneficiaries are satisfied with the program.
    They have affordable choices, and they have good information
    with which to make choices and that they have greater, better
    access to generic medicines. If that is true, it is good news.
    And to be honest, after we have spent almost $100 billion on
    this program, I would hope that would be the case.
        The issue for us is whether the taxpayers are getting the
    best value for their $100 billion, and that is why the findings
    of the report released this morning are so troubling. The
    report finds that the prices paid by Part D insurers for the
    100 drugs most used by dual eligibles are a lot higher than the
    prices Medicaid pays. On average, Medicare Part D is paying 30
    percent more.
        Mr. Weems, the central finding of the report is that
    Medicare Part D is paying significantly higher prices for drugs
    than Medicaid. Do you agree with this finding?
        Mr. Weems. Mr. Chairman, I had the opportunity to be
    briefed on your report; and I appreciate the opportunity for
    that. I have not had the opportunity to examine it in depth,
    but I would find that, for those particular drugs, that a
    government-enforced price-setting system likely can produce
    lower prices, but that does not take into account the cost that
    may spread through the rest of the system. Yes, the prices may
    be lower in a government-administered pricing system, but, as a
    result, they may be higher in the Federal employees benefits.
    So I would say that we would need to perform the rest of the
    analysis to see where those costs flow to.
        Chairman Waxman. Well, we had the Medicaid system in place
    for 10 years with pharmaceutical rebates. Do you know that--if
    there is any evidence to show that there was a flow throughout
    the whole system of higher drug prices?
        Mr. Weems. Yes. We have evidence that suggests that, yes,
    costs were higher in the private sector as a result and also
    that there was a----
        Chairman Waxman. Can you say that those higher prices were
    attributed to the Medicaid payment? Or are drugs getting higher
    every year?
        Mr. Weems. Well, I believe there is research that
    attributes to that, and it is also no accident that the amount
    of rebates that were available under the best price began to go
    away under under the--in the private sector.
        Chairman Waxman. We have looked at all the research on this
    subject, and we can't find any studies that substantiate your
    position. So we would like you to submit that to us for the
    record.
        You're in charge of Part D; and what we see is that,
    according to this report, taxpayers paid more than $3.7 billion
    over the first 2 years of the program as a result of the dual
    eligibles not being given the Medicaid price and now going to
    the Medicare price. Does that concern you?
        Mr. Weems. Again, I think the analysis may be incomplete.
    It may be that the prices were--you know, there could be a
    lower price there, but it is also likely that those prices
    would have shown up higher someplace else, probably in the non-
    dual part of the Part D program.
        Chairman Waxman. You have emphasized that Medicare Part D
    is costing less than projected----
        Mr. Weems. Yes.
        Chairman Waxman [continuing]. And that is true. But the
    biggest reason the costs are less is that fewer seniors have
    enrolled than projected. It is obvious that if Part D is
    serving fewer seniors, it's costs are going to be lower.
        On the central issue of drug prices, Part D is overpaying.
    Before January 2006, the 6 million dual-eligible beneficiaries
    were getting their drugs through Medicaid. After January 1,
    2006, they started getting their drugs through Medicare Part D.
    The only thing that changed is how much the taxpayers have to
    pay for these drugs. The cost for just 100 popular drugs
    increased by $3.7 billion. That is indisputable.
        Are you putting the interest of the big drug companies
    ahead of the interests of the taxpayers when your concern is
    not for the extra costs that we are actually paying for these
    very same beneficiaries?
        Mr. Weems. Let me dispute one of your premises, if I might,
    that the only thing that changed was that the price changed.
    No, something else changed; and that is that the beneficiaries
    were moved from a State-run, price-fixing program--in some
    cases, of States with restricted quantities--into a risk-based
    insurance product, where they have in many cases, even for the
    low income, the dignity of choice, which they didn't have in
    Medicaid, broader access to more drugs and no limits on the----
        Chairman Waxman. That depends on what plan they joined.
    Because the plans could restrict the drugs' formulary.
        But the Medicaid rebate program, which I helped design--I
    was around when we adopted it. It is all voluntary. The drug
    company didn't have to participate. And the drug companies
    participated on the basis that we would demand the best price
    for them that they were charging others in exchange for adding
    all their drugs on the formulary. So the companies benefited by
    making sure that all their drugs could be available to Medicaid
    patients.
        This wasn't a fixed price or price fixing. It was a
    negotiation by the government for a lower price for that
    population. Now we have no negotiation; and, as a result, I
    believe, we are seeing higher prices. We are definitely paying
    higher prices. Would you say it is because we don't negotiate
    it any longer? Is it because we don't have the Medicaid
    reimbursement formulary that--for that same population for
    those same drugs?
        Mr. Weems. Again, I would say there is only half the
    analysis; and that is the analysis that, you know, the States
    pay. You can look at the--you know, the price that is mandated
    by the rebate. The analysis that needs to be complete is what
    happens on the other side of the equation, the market equation,
    when--press down prices here, they are going to go up someplace
    else. The Federal employees benefit program, private insurer,
    we've seen it happen.
        Chairman Waxman. We'd have to see if that is the case. I'm
    looking forward to see what documentation you have for that.
        If we had lower prices in the United States, it would
    probably lead to higher prices in the other countries. Should
    we worry about that?
        It just seems to me that for the dual eligibles that we
    actually provided drugs to under the Medicaid program at a
    lower cost and we are now paying for that same population at a
    much higher cost and for that group we are paying a lot more
    money. I don't think--I don't see what we're getting for that
    extra money.
        Mr. Weems. If we were to--let's take one of the suggestions
    that one of the academics made here. And that is if we were to
    take that dual-eligible population and apply the rebate, the
    Medicaid rebate, to that population, the most likely initial
    result would be an increase in Part D for everybody else who is
    not dually insured. Is that, you know, the consequence that we
    would like to have? Is, you know, a secular increase in Part D
    that then spread beyond Part D and other parts of private
    market?
        Chairman Waxman. I don't believe that would be an accurate
    statement of what would happen. I think the drug companies are
    trying to maximize the amount they can get for their drugs; and
    if you provide more money for their drugs, they are going to be
    happy to take it. So I don't see evidence for that statement.
        I'm going to reserve the balance of my time, which is 1
    minute and 37 seconds and yield to--now 10 minutes to Mr.
    Davis.
        Mr. Davis of Virginia. We just have a fundamental
    disagreement between us over if you reduce costs in one area,
    does it raise costs in other areas. Somehow I think the
    chairman and advocates on that side think that this just comes
    out of the drug companies' hides and that is the end of it and
    it has no effect on research and development or anything else.
    And I don't think that is borne out.
        The majority staff report found that Part D rebates are
    smaller than Medicaid rebates. You're not surprised by that
    finding, are you?
        Mr. Weems. Not at all.
        Mr. Davis of Virginia. Is this new information?
        Mr. Weems. No.
        Mr. Davis of Virginia. In Congress, we often lobby to
    change reimbursement for different services covered by Medicare
    or to expand those services all from political perspectives.
    The drug company or somebody could be--or a manufacturer could
    be from your district and there is pressure to slip this in
    here or slip this in there or expand services to one needy
    group over another.
        At CMS, we are tasked with creating a national formulary or
    setting prices. Do you think the process would be open to
    meddling by Congress by disease advocates and drug
    manufacturers?
        Mr. Weems. Absolutely. And, you know, we can see the
    evidence of this. You know, if you look at the mail that CMS
    receives, we receive virtually no mail--I don't think I'm in a
    position to say zero--but virtually no mail about the price of
    specific drugs under Part D. We receive huge volumes of mail
    about those drugs for which we do administer pricing under Part
    D. A lot of mail, a lot of pressure and, in some cases, there
    is even legislated prices----
        Mr. Davis of Virginia. When you say mail, are you talking
    about mail from Members of Congress?
        Mr. Weems. Members of Congress, manufacturers, lobbying
    organizations, you name it. We receive virtually none of that
    under Part D. One of the great success stories of Part D is it
    has depoliticized the price of individual drugs.
        Mr. Davis of Virginia. What would be--is that one of the
    reasons, you think, that the costs that were projected
    originally are far and above what has actually taken place?
        Mr. Weems. That and the effects of competition.
        Mr. Davis of Virginia. I mean, there is a fundamental
    difference, that some of us believe competition brings down
    costs, some of us think that the government is smart enough to
    be able to just negotiate the best cost because of our buying
    power. In fact, there are some formularies that have greater
    potential buying power than the Federal Government.
        Mr. Weems. The PBMs, the prescription benefit managers, the
    ones that the Part D program use, represent about 240 lives
    across the Nation. So that is real buying power.
        Mr. Davis of Virginia. If CMS--we talk about we are tasked
    with creating a national formulary, setting prices. What impact
    could that have on seniors in Part D?
        Mr. Weems. If it is a highly restrictive formulary, it
    might mean that they don't get the drugs that they need.
        Mr. Davis of Virginia. Mr. Weems, you have been a career
    employee, haven't you?
        Mr. Weems. I am a career employee, sir.
        Mr. Davis. So you are a career employee on there. You
    weren't some administration lackey or anything else that they
    were able to take because you had given contributions to a
    campaign or been active in political causes, right? You're a
    career employee, and you have worked at this all your life?
        Mr. Weems. I started my career in 1983 as a junior budget
    analyst with the Social Security Administration.
        Mr. Davis of Virginia. How does the financial outlook for
    Medicare Part D compare to the Part A program which covers
    hospital care?
        Mr. Weems. They are financed entirely differently. Part A
    is financed by FICA taxes. Part D is financed by premiums and
    by general fund transfers. So the financing schemes are
    different.
        Part A, because of its financing schemes and because of the
    rising costs in Part A, is going to go broke in 11 years,
    according to the trustee's report.
        Mr. Davis of Virginia. And you concur with that from your
    observations?
        Mr. Weems. I do.
        Mr. Davis of Virginia. And Part D?
        Mr. Weems. Part D is financed, as I said, from--it is
    financed entirely differently, and so it is not subject to the
    same sort of constraint that the Part A is.
        Mr. Davis of Virginia. But, in fact, the projections on
    Part D, are they greater or less than were projected in terms
    of the costs to the government?
        Mr. Weems. In fact, you can see the original cost estimate
    is the upper line.
        Mr. Davis of Virginia. That is the third chart over?
        Mr. Weems. That is the third chart over. The lower line is
    the most recent cost from the President's budget, most recent
    cost estimates.
        Mr. Davis of Virginia. So Part A has basically been
    overruns and Part D has been underruns in terms of----
        Mr. Weems. Again, Part A--in fact, this year in Part A, the
    expenditures of--in Part A will exceed what we take in in taxes
    for Part A.
        Mr. Davis of Virginia. Now, in the previous panel we
    heard--I think it was Dr. Anderson testified that all Federal
    prices for prescription drugs should be uniform. Outside of
    prescription drugs, does Medicare, Medicaid, the VA and FEHBP
    pay uniform prices for health care services?
        Mr. Weems. No, they don't. Not as a matter of policy. There
    might be times when they----
        Mr. Davis of Virginia. Coincidentally.
        Mr. Weems. Yeah, by coincidence.
        Mr. Davis of Virginia. How do you think an effort to make
    prices uniform across these programs to the lowest denominator
    would be received by physicians or hospitals?
        Mr. Weems. Well, you know, Mr. Davis, it is an interesting
    question. And the question--the answer to that question depends
    on your philosophy.
        If you were to do it through competitive means, you would
    allocate resources correctly. If you were to turn it over to
    CMS with my very well-meaning Federal employees who fix prices
    every day for A and B, we likely would not get it right.
        Mr. Davis of Virginia. There is sufficient evidence that
    Medicaid price controls increase prescription drug prices to
    private payers, which in the United States are generally
    employers. These are like GM and Ford who are competing in a
    global marketplace. Although we may get a reduction for
    Medicaid recipients, in effect, I think there is evidence that
    drives up the costs to these companies that has an effect
    downstream in terms of their ability to compete.
        GM and Ford have both cited higher health care costs as one
    of the factors affecting their decline in global
    competitiveness. What do you think would be the impact of
    requiring Medicaid prices in Part D on Ford or GM?
        Mr. Weems. For the entirety of Part D?
        Mr. Davis of Virginia. And union pension plans I guess you
    could throw into that as well.
        Mr. Weems. Sure, sure. So Part D, together with Medicaid,
    represents over half of the pharmaceutical market in the United
    States. Applying government cost controls to more than half the
    market and pushing down that half of the market to some
    specified pricing scheme would definitely--and I say this
    without reservation--cause cost increases in the rest of the
    market, which specifically would be the private sector. And,
    you know, for companies like Ford and GM, it would
    substantially increase the pharmaceutical costs in every
    vehicle.
        Mr. Davis of Virginia. You don't think the pharmaceutical
    companies would just say, we're going to continue the same
    amount on research and development anyway. We're just going to
    take this out of our bottom line, reduce advertising costs and
    the like?
        Mr. Weems. I think that is unlikely, but the next panel
    will have somebody from pharmaceutical companies on it, and I
    would invite you to ask them.
        Mr. Davis of Virginia. OK. I happen to agree with you.
        Much has been made about the Medicaid coverage of
    prescription drugs, but prices are only one factor in
    determining the success of any new benefit. How do you think
    seniors' access to drugs in Part D compares with Medicaid
    recipients' access to drugs?
        Mr. Weems. They have more access and more choices. The main
    feature of Part D is the ability to choose a plan that works
    best for the individual.
        Mr. Davis of Virginia. You may have a rare disease or
    something that is not covered, for example, by Medicaid----
        Mr. Weems. Correct.
        Mr. Davis of Virginia [continuing]. That is covered by Part
    D, and you can choose that particular----
        Mr. Weems. A lot of it just has to do with choice. You
    know, what is the level of premium that I want to pay each
    month? What is the amount of co-pay that I want to be exposed
    to? Do I want to use my neighborhood pharmacy?
        Those are the kinds of things that seniors find extremely
    agreeable about this program, that it is not a government one-
    size-fits-all, the government picks winners and losers. It is
    that there is choice and a lot of choice, and their drugs are
    available to them in a very convenient way that--where they can
    get what they want.
        When I talk to seniors around this Nation--and I spend a
    lot of time talking to them--we hear great satisfaction with
    Part D. And what they say over and over again is don't take
    this benefit away from us. Make sure you keep this benefit.
    This benefit is working for us.
        Mr. Davis of Virginia. I think that is why you don't hear
    the majority saying let us move these dual eligibles back to
    Medicaid. Because it would be politically very, very unpopular
    with these groups. And now they'd like to have a hybrid, it
    seems to me, of--well, we are going to have Medicaid pricing in
    Part D for some items and the like.
        Mr. Weems. In fact, satisfaction rates for the duals are
    higher than those even of the regular population. For one of
    the first times, they have been given the dignity of choice
    from a government program.
        Mr. Davis of Virginia. As opposed to a one-size-fits-all,
    take-it-or-leave-it?
        Mr. Weems. That's correct.
        Mr. Davis of Virginia. The purpose of the Medicaid price
    regulations was to control the cost to States and the Federal
    Government. That is why they put the price controls in. Since
    implementing price controls 18 years ago, do you have any
    observations on the cost of prescription drugs in Medicaid?
    Have they remained flat? Have they gone up? Have they gone
    down?
        Mr. Weems. Well, you know, the best price provisions, the
    provisions with respect to rebates, are fixed from a price. So
    drug prices continue to go up. You know, they have been
    effective in reducing the liability for drugs in the Medicaid
    program while increasing the liabilities in other places and
    causing market distortions in other places on the market.
        Mr. Davis of Virginia. OK. My time is up. Thank you.
        Mr. Yarmuth [presiding]. We have a series of votes, as you
    might have noticed. So we'll at this point recess the hearing
    and reconvene at 1.
        [Recess.]
        Chairman Waxman [presiding]. The meeting of the committee
    will come to order.
        The Chair recognizes Mr. Murphy to pursue questions.
        Mr. Murphy. Thank you very much, Mr. Chairman.
        I wanted to make a brief comment off of the chairman's
    concern, Mr. Weems, over the terminology you used regarding the
    Medicaid rebate program and that is peppered in your testimony,
    both written and oral, is the idea that this is price control,
    that this is price fixing. When it seems to us that it is
    merely using the market leverage and market power of the
    Federal Government to do exactly what private industry does,
    what the HMOs do in negotiating these prices, which is to say,
    through a choice of a particular pharmaceutical company, that
    this is the price that we're willing to pay. And if you don't
    pay it, then you're not going to be part of our plan, which is
    essentially what the Medicaid rebate program does.
        Price control strikes me as something very different. I
    mean, that is a statutorily imposed price that everyone has to
    accept for their product.
        This is a voluntary program. I would hope that we'd be a
    little careful in mixing what is a voluntary rebate program
    that the pharmaceutical companies pay as a means of selling
    their drug in a particular plan, the Medicaid plans versus what
    is traditionally thought of as price controls.
        But my question is a little bit different, and that is--
    your testimony, Mr. Weems, as to the disruption in the delivery
    of health care that would result from imposing Medicaid rebates
    on the dually eligible population. And I want to just ask you
    to elaborate a little bit on that as to what evidence you have
    that gaining these discounts for taxpayers would lead to this
    potentially troublesome disruption of the health care delivery
    system.
        Mr. Weems. Thank you for the question.
        And, you know, I don't mean to get into a semantic battle.
    But, in my view, a system which fixes a specific rebate amount
    and fixes it through statute is very different than a
    negotiation. And the 15.1 percent rebate in Medicaid is fixed
    and fixed in statute. So I would stand by my terms, sir.
        You know, as for the disruptions--I mean, we can--we can
    see this. You know, it was the GAO report that found that, in
    the 2 years following the implementation of the Medicaid best
    price rebate program, the best price discount for outpatient
    drugs purchased by HMOs and PPOs decreased to about 14 or 15
    percent, which is approximately the minimum required by the
    statute.
        CBO found that the best price rebate program, found that
    drug purchasers in the private sector, their discounts weren't
    as good. Between 1991 and 1994, the best price discounts that
    pharmaceutical manufacturers gave off of wholesale prices fell
    from 36 percent to 19 percent.
        Mr. Murphy. For private insurers?
        Mr. Weems. That's correct.
        Mr. Murphy. So you're suggesting that there is a movement--
    there is also testimony that you give about we would have a
    discouraging of employers from continuing to provide
    prescription drug coverage at the same level they do today. Is
    that----
        Mr. Weems. If it is more costly, we can expect less of it,
    yes.
        Mr. Murphy. I guess it strikes me as strange that the
    testimony here is that we are essentially going to be--that
    today we are, in essence, subsidizing privately held plans
    purchased through employers?
        Mr. Weems. No, not at all.
        Mr. Murphy. Wouldn't that be the converse of suggesting
    that--if your suggestion is that by the taxpayers paying less
    that you're essentially pushing the bubble in somewhere and it
    comes out somewhere else, that private employers are going to
    pay more, wouldn't the suggestion be currently today then we
    are subsidizing private employers' purchase of----
        Mr. Weems. Not at all. You need to compare the two systems.
    If, in fact--if you had a competitive pricing system on both
    sides, then you can make a direct comparison. But, in fact, on
    the Medicaid side, there are mandatory rebates. The simple
    hydraulics of supply and demand means that, as you force down
    those prices, they are going to go up someplace else. That, in
    fact, means that the private sector currently is subsidizing
    Medicaid.
        Mr. Murphy. And currently, though, how does that not lead
    to an argument that we are currently, through our inflated
    prices that we are paying--and you admit that the prices we are
    paying today are not commensurate with what Medicaid is
    paying--isn't providing a subsidy on the other side to the
    private insurers?
        Mr. Weems. No. The market--the market prices--you're asking
    to compare a risk-based market price to a government-imposed
    price. They don't compare. Because you have the cross subsidy
    and you're not able to capture the cost of forcing down the
    lower price and the cost that imposes on the rest of the
    nongovernment cost-controlled part of that sector.
        Mr. Murphy. And I know my time has expired, Mr. Chairman.
    But to get back to, I think, a fundamental disagreement, I
    think that the government rebate program is not completely risk
    independent. I mean, we obviously are setting a price at which
    we believe that the drug provider will continue to provide the
    pharmaceutical product. We are incorporating risk because we
    know if we set the rebate price too high that pharmaceutical
    company will no longer sell the product. So it may be different
    than the negotiation in the back and forth that occurs in the
    private sector, but it is completely interdependent upon risk.
    Wouldn't you agree that is part of the----
        Mr. Weems. No. I think we're talking about risk in two
    different ways. When I refer to a risk-based insurance product,
    that is what we have in Part D where the--the profit, the
    equity of the firm is in fact at risk for achieving a good bid,
    for lowering drug prices and for bringing in recipients into
    their plan. That's the risk. That's a much different kind of
    risk than the kind you're describing.
        Mr. Murphy. You're right. I am mixing terms.
        I guess what I'm suggesting is that the fundamentals of
    supply and demand that underlie a negotiation between an HMO
    and a pharmaceutical company are not absent from the
    determination of what the rebate will be under the Medicaid
    program. Because if the rebate again is set too high, then that
    drug will not be provided as part of the Medicaid program. So
    many of the same economic factors that underlie those
    negotiations are present in the determination of the----
        Chairman Waxman. Your time has expired.
        If you want to make a comment. Otherwise, we can move on.
        Mr. Weems. We can move on, sir.
        Chairman Waxman. OK. Mr. Issa.
        Mr. Issa. Thank you.
        Are you aware of the history of this best price practice
    that Medicaid has where, a year after its implementation, the
    Department of Veteran Affairs asked Congress to exempt it from
    the calculation of Medicaid's best price because in fact it was
    raising their prices? Isn't that true?
        Mr. Weems. To the best of my knowledge, yes.
        Mr. Issa. So here we have the gold standard to a certain
    extent. The Veterans Administration buys selected drugs at the
    best possible price, makes decisions, including formulary
    decisions, based on the best value for our veterans and then
    makes it available to other--certain limited other government
    agencies such as Bureau of Indian Affairs and so on for Indian
    health, and they choose to always take advantage of it because
    the prices are good. And they are saying, when you mandate a
    discount, you distort the market and you distort the likely
    retail price. Now, isn't that really what we're really talking
    about?
        Mr. Weems. Sure. And we've seen that, since the best price
    mandate, that best prices have gone up, unsurprisingly, I would
    say.
        Mr. Issa. So a question I asked the economist earlier
    today--and I will challenge you on this side some--isn't our
    gold standard--the Veterans Administration, it backs up a
    truck, takes a whole truckload, reduces reliability,
    administration, takes the drugs and makes a good price. Isn't
    that the gold standard for pretty much as good as you would do,
    assuming you don't simply distort the market and demand a lower
    price, regardless of merit?
        Mr. Weems. Well, I might disagree with that
    characterization, because I think it--first of all--and we are
    probably trying to get to the same place here. But, first of
    all, the Veterans Administration is a government agency that
    actually takes custody----
        Mr. Issa. And maybe I can clarify. What I'm saying is, when
    you do all of those things, you get the price maybe lower than
    any other plan.
        Mr. Weems. Quite possibly.
        Mr. Issa. But when we're looking for the lowest possible
    price, we should not look to Medicaid with a mandated price, we
    should look to a bulk buyer buying by reducing administration
    and risk to these companies. When they make a buy, they make a
    big buy; and you just ship it.
        Mr. Weems. That's right.
        Mr. Issa. OK. So, earlier today, I said, when we want to
    evaluate Medicare Part D's performance, shouldn't it be taking,
    if you will, if possible arithmetically, take the VA, put back
    in the administrative cost of not buying from a single payer
    but rather allowing people to get drugs where they want to be,
    where their doctors and their pharmacies are, rather than going
    to a VA facility to pick them up. Recognizing there is
    distribution costs, administrative costs, but that convenience
    is something our seniors demand because they want that
    capability. They're not asking us to please have 35 locations
    around the country they can drive to to get their drugs.
        If you add back in those reasonable costs and so on, isn't
    that the standard where we would like to see Medicare Part D
    close to? And in your estimation are we, when you add back in
    those costs, somewhat close?
        Because here today it seems like everybody wants to use
    Medicaid, which is an artificial mandated price, as the gold
    standard, rather than any other comparison. Or they want to use
    Canada, where they say if you don't give us a lower price,
    we'll simply void your patent and knock it off. So that is my
    real question. Can you progress on how you see it should----
        Mr. Weems. Sure. That makes the comparison more fair. But
    the thing that--that Part D offers that--you know, is that you
    need to layer in again here is the choice of plans, you know,
    the many, many choices that are available to seniors and the
    way that they can, you know, structure their payments. They can
    choose, you know, a higher premium level in return for lower
    structured co-payments, those kinds of things. All of that adds
    to the value of Part D. And, you know, once you step up from a
    highly restricted--all the way up to a program that offers
    considerable choice----
        Mr. Issa. Right. And, look, I have no question at all that
    my seniors want the features of being able to choose between
    formularies, to have some choices, to decide sort of good,
    better and best.
        One of the controversial things by some here on the dais
    is, well, why don't we just have one formulary? Why don't we
    just have one solution? In a sense, the price that Medicare
    Part D gets, which is better than originally forecasted, isn't
    one of the most important parts of that. The fact that
    independent companies compete based on their formulary and
    features and by the way offered to pharmaceuticals, do you want
    to be with us, and will you give you a better price for it,
    because they are not necessarily taking every therapeutic
    solution.
        Mr. Weems. That's absolutely true.
        Mr. Issa. If we come up with one mandated solution,
    although we might get a lower price on that, don't we distort
    the market for what the seniors want?
        Mr. Weems. Yes. And I would say that there are two aspects
    to that. First of all, that a restricted formulary may mean
    that some people don't get the drugs they need; and, second, it
    puts the government in the position of choosing winners and
    losers in the marketplace.
        Chairman Waxman. The gentleman's time has expired.
        Ms. Foxx, do you have questions?
        Ms. Foxx. Thank you, Mr. Chairman.
        I think that last point was really important, that we
    should not be putting the government in charge of picking
    winners and losers, especially when it comes to health care.
        I have a couple of questions that I'd like to ask you, Mr.
    Weems; and I would say that I'm not always happy with the way
    CMS operates. There are things that I disagree with that you
    all have done, and so there are lots of things that I think
    could be done better over there, And we'll have another
    conversation about that sometime after this.
        But let me ask you a question. According to the material
    that you all have produced, Medicare Part D enrollees continue
    to save about--excuse me. I'm asking the wrong question. You
    show that Part D costs are lower than the initial estimates.
    Can you tell us what accounts for that?
        Mr. Weems. Sure. There are a number of things. First of
    all, that the degree of competition that occurred in the system
    was more robust than originally estimated; second, the price of
    drugs has not risen as fast as originally estimated; then,
    last, the total population enrolled is somewhat lower than
    originally estimated.
        Ms. Foxx. The second question has three parts to it.
        You have been around the Department for a long time, and
    you probably will remember during the debate about Part D there
    were a lot of doomsday predictions. I was not here during that
    debate. I didn't vote on Medicare Part D. But tell me in your
    opinion which--how these doomsday predictions have worked out.
        No. 1, did plans refuse to offer drug-only insurance? I'll
    ask all three of the questions, and then you can respond. Did
    plans cherry-pick only the healthiest seniors? And you've
    already mentioned this about drug prices not rising
    exponentially. If we have time, I would like you to also say
    something about the price of drugs holding down the cost of
    health care in other areas.
        Mr. Weems. You know, clearly, there was a lot of concern at
    the beginning that there wouldn't be marketplace entry. There
    has been robust and substantial marketplace entry. In fact, the
    complaints are reversed, from nobody is going to get into this
    to aren't there too many.
        As for cherry-picking, that is something that we still
    remain very, very vigilant about in CMS. Every year when the
    bids come in, we examine the bids, we examine the formularies
    to make sure that there are not discriminatory bids as part of
    that.
        You know, as for pricing, you know, if you--73 percent of
    our enrollees are in plans where the price index did not
    increase by more than 3 percent; 50 percent are in plans where
    the price index did not increase more than 2; and 14 percent
    are in plans where the price actually fell. So we not only see
    good price stability, we also see that our seniors are able to
    protect themselves against the risk of higher prices in the
    plans and also during the plan year by choosing tiered co-
    payments. Ninety-five percent of our beneficiaries buffer
    themselves against the risk of payment increases by having set
    co-payments, rather than percentage co-payments.
        Ms. Foxx. Thank you.
        Mr. Chairman, I would just like to make a brief comment.
        I find it so interesting that, in matters of choice, the
    majority party here wants choice when it comes to destroying
    life but not choice for citizens when they have the opportunity
    to save money and have better health care. Because it seems to
    me that one of the things that drives the majority party so
    crazy about Medicare Part D is that people do have choice. We
    don't want people to have choice about where to go to school,
    but, again, we do want them to have choice to kill babies.
        The other thing that I think is not recognized that Mr.
    Shays said earlier is Medicare is in deep trouble; and there is
    material out all over the place today that the majority party
    is going to avoid dealing with the trigger, going to sweep that
    under the rug. We don't want to deal with the big issue of
    Medicare, but because there is this animus toward the drug
    companies, it is easy to pick on drug companies and pick on the
    private sector whenever we possibly can and make them look bad.
        So I think we need to be dealing with the real problems
    that we have, which is the major Medicare program and what has
    come to be called an entitlement, because that is where our
    real problems are.
        Chairman Waxman. The gentlelady's time has expired.
        Mr. Weems, I want to ask you some questions. Under Medicare
    Part D, people can choose a plan that will offer them some
    drugs. It doesn't have to be every choice of drugs, but they
    have their formulary or they can join another plan that will
    have its formulary. Isn't that the way it works?
        Mr. Weems. That's correct, yes, sir.
        Chairman Waxman. So they have a choice, but they may find
    one drug on one plan but not on that same plan for another drug
    so they have to--they really can't pick and choose. They can't
    belong to two plans. They can only belong to one. So they don't
    really get the choices of all the drugs they need.
        Under the old Medicaid, they had all the drugs on the list.
    So I just say that rhetorically when we talk about how much
    choice we are actually giving people.
        Second, I want to point out you said with pride that a lot
    of insurance companies are out there competing and that just
    shows us it is wonderful and really working. But it also might
    show that they are making a lot of money; and if they're making
    a lot of money, why not go into that business? I just say that
    rhetorically as well.
        Then the other thing I want to ask you is, we had 6 million
    people on Medicaid, and we paid less for them. Now they are on
    Medicare Part D, and we pay more for them. It is your premise
    that, if we paid less, the prices would go up in other areas
    where government spends on drugs; is that right?
        Mr. Weems. That's correct. Or in the private sector. I
    wouldn't just limit it to government, sir.
        Chairman Waxman. OK. Now that we've taken 6 million people
    and we have paid less for them, are we seeing a drop in what is
    being paid in other government programs or in the private
    sector?
        Mr. Weems. Again, I think that is a question that bears
    examination. The question may be----
        Chairman Waxman. It goes to your argument.
        Mr. Weems. It bears examination, sir.
        Chairman Waxman. Have you seen any evidence of the prices
    dropping for other government programs?
        Mr. Weems. One of the reasons that we did not see the top
    line on that is prices have not increased in the way or at the
    speed that was originally estimated. So I would point to that
    as evidence, sir.
        Chairman Waxman. What prices haven't increased at the speed
    of----
        Mr. Weems. Drug prices.
        Chairman Waxman. Who estimated them?
        Mr. Weems. The original estimate from the Office of the
    Actuary for the----
        Chairman Waxman. Is that the one we were never allowed to
    see? We still haven't gotten that one, as I understand. That
    was--the actuary's life--no, not his life, his job was
    threatened if he shared with Congress the cost.
        Well, let me go into another question. Let us say we spent
    $3.7 billion for 6 million beneficiaries when they're under
    Medicaid--$3.7 billion less, now we're paying $3.7 billion
    more. Is that the best use of our $3.7 billion? The drug
    companies like it, but couldn't we use that for other purposes
    when we have so many uninsured?
        For example, one of the reasons the President said he
    vetoed the SCHIP bill was because it cost so much money. Well,
    that $3.7 billion would have covered 3.3 million uninsured
    children. Which is a better use of that money, paying it to the
    drug companies or paying less to the drug companies and using
    it for children?
        Mr. Weems. Again, sir, I think that analysis ignores--is
    only half the equation. It ignores the distortions that the
    price setting creates in other parts of the market. You may----
        Chairman Waxman. We can't be responsible for every
    distortion--you have never given us any evidence of that. But
    even if you do, there are always distortions.
        I want to ask you one question about this issue of
    distortion. Do you think if we charge less--let me put it this
    way--if we charge more for drugs that the drug companies say,
    well, since I'm making so much money under this Medicare Part
    D, I'm going to give a break to these other payers of the
    private sector?
        I can't believe that is the case. They are in business to
    make money. If they can sell their drugs at a certain price to
    the private sector, they'll do it. If they can sell their drugs
    to the government at a higher price, they'll do it. It is when
    somebody says, no, we're not going to pay the higher price that
    they have to realize that they're not going to make the money
    they were making before and then make their business
    calculations.
        Mr. Weems. And I think you perfectly encapsulated the
    problem with government-administered pricing. We know that in
    Part A and B we overpay in some areas and underpay in others,
    and it creates distortions and costs that, frankly, we're not
    able to measure.
        Chairman Waxman. In Part D?
        Mr. Weems. A and B. In Part A and B. It is a government-
    administered prices program. We know that we overpay.
        Chairman Waxman. Would you be surprised if you found that
    one plan was paying more for the same drug than another plan
    under Part D?
        Mr. Weems. For the same drug, no.
        Chairman Waxman. You wouldn't be surprised?
        Mr. Weems. No.
        Chairman Waxman. Would you be surprised if one plan was
    bargaining for lower prices and didn't pass it onto the
    consumer but increased their profits?
        Mr. Weems. If it is a rebate, they have to pass it on in
    their premiums, sir.
        Chairman Waxman. Well, it may not be a rebate. They just
    negotiated a better price because they did some deals. That's
    what we want in the market, right?
        Mr. Weems. That's correct.
        Chairman Waxman. Pass on the lower prices to the Medicare
    system or beneficiary or does it just simply make all those
    companies that to our surprise decided to go into the business
    richer?
        Mr. Weems. If they are going to compete for beneficiaries,
    they're going to have lower premiums, and that drives down
    their profits.
        Chairman Waxman. Do you think that's the only reason signs
    up on one plan as opposed to another, the price?
        Mr. Weems. The price and the coverage of the drugs.
        Chairman Waxman. Yeah. OK. Thanks.
        The gentleman from North Carolina, Mr. McHenry is
    recognized.
        Mr. McHenry. I appreciate it, and I hope we will still have
    the same liberal time policies for me as for you. I know being
    chairman has its privileges.
        Chairman Waxman. I went over 30 seconds. If you want an
    extra 30 seconds, I'll give you----
        Mr. McHenry. That would be great, but I think you probably
    just burned it.
        So anyway----
        Chairman Waxman. I can't make you happy any way, huh?
        Mr. McHenry. Well, actually, you know, your philosophy is
    very different and your focus is different here because--based
    on the studies----
        Chairman Waxman. The gentleman's time is just beginning at
    5 minutes.
        Mr. McHenry. OK.
        Chairman Waxman. Take my generosity.
        Mr. McHenry. I appreciate your generosity.
        But in this particular case, I think we do have some
    disagreements. Because, based on the studies I have seen, Mr.
    Weems--now, you know, Medicare Part D has cost both less for
    consumers that are using the program and for the taxpayers than
    the original cost estimate; is that correct?
        Mr. Weems. Forty percent less, yes.
        Mr. McHenry. Forty percent less?
        Mr. Weems. Yes, sir.
        Mr. McHenry. So market forces are--have been much more
    powerful in bringing down the cost than the government setting
    an arbitrary dollar amount that they will pay for an arbitrary
    drug?
        Mr. Weems. The power of Part D has been to use market
    forces to bring prices down well below those that were
    originally estimated.
        Mr. McHenry. OK. There is an IMS health report in 2007.
    Generics--and it said, generics account for 13 of the 15 drugs
    most prescribed by Medicare Part D. All right? And also
    according to this study, generics accounted for 68 percent of
    all medicines prescribed in Part D.
        Mr. Weems. Generic usage is in the 60 percentile. My number
    is about 64 percent.
        Mr. McHenry. So can you comment on the effect that has on
    the cost for the consumer, the senior and for taxpayers?
        Mr. Weems. Sure. And that was one of the points that I was
    making earlier. It is not an exact comparison to compare
    somebody who is in a price-fixed indemnity program to a risk-
    based program that has some additional benefits to it, you
    know, such as therapy management, such as therapeutic
    interchange. I mean, there can be and, you know, we have seen
    scenarios where somebody who was in Medicaid came over to
    Medicare, was able to get more of the drugs, would be able to
    get more drugs, the ones that they needed and, in many cases,
    to be able to get those at a lower price and have better health
    outcomes and avoid costs in the A and B part of the Medicare
    program.
        Mr. McHenry. I have four questions here in succession. You
    can answer them just briefly.
        Do Medicare and Medicaid programs generally serve the same
    type of beneficiaries? Yes or no?
        Mr. Weems. No.
        Mr. McHenry. OK. Are Medicare and Medicaid programs
    financed the same way?
        Mr. Weems. No, they're financed very differently.
        Mr. McHenry. OK. So then is it fair to say that Medicare
    and Medicaid are two fundamentally different programs?
        Mr. Weems. They are.
        Mr. McHenry. They serve different beneficiaries and have
    different benefit structures and are financed in different
    ways?
        Mr. Weems. Yes.
        Mr. McHenry. So if you and I understand this correctly--I
    mean, obviously, by overseeing the program, you know, you have
    a depth of knowledge. Do you believe that the price structure
    of one program would work for the other program?
        Mr. Weems. Well, clearly, it would not be wise to move the
    price structure of the Medicaid program into the Medicare
    program where there would essentially be an administered price-
    fixing arrangement for, you know, more than half of the
    pharmaceutical market in the United States. That would have, at
    least in my estimation, you know, considerable effects that
    would spill over into the private sector in terms of higher
    costs. So I would say that would not be particularly wise.
        Mr. McHenry. There are some shortcomings with the program.
    It is a government program. It is what government does very
    well. Inefficiency is what government does very well. However,
    because market forces are involved, it has been better in terms
    of the cost and the benefits to consumers.
        So we have talked about the negative aspects of the
    program. That's what this whole hearing is about, after all.
    That is why you have a crowd behind you and the reason why the
    chairman had it. But can we talk about some successes, and, you
    know, and answer one general question? Has Medicare Part D
    shown to improve beneficiary access at a less-than-expected
    cost?
        Mr. Weems. Certainly. And beneficiaries are getting the
    drugs that they need. They are getting it in a way that is
    convenient to them. It is a real challenge to find any program
    that has a satisfaction rate of 85 percent on the part of the
    beneficiaries, and that's what the Medicare Part D program has.
    Among the low-income beneficiaries, it is 90 percent.
        Mr. McHenry. Thank you, Mr. Chairman.
        Chairman Waxman. Thank you, Mr. McHenry.
        Mr. Weems, thank you very much for your participation. I
    know you're anxious to get back to the work that the government
    bureaucracies do so poorly, according to my friends on the
    other side of the aisle. But I salute you for the work that you
    do, and we want to make laws that will make sure that we
    protect the taxpayers and the beneficiaries.
        Mr. Weems. Thank you for the opportunity to appear, sir.
        Chairman Waxman. For our next panel, we want to call
    forward Mr. Mark Merritt, president and chief executive officer
    of the Pharmaceutical Care Management Association; Mr. Rick
    Smith, senior vice president for policy, Pharmaceutical
    Research Manufacturers Association [PhRMA]; Mr. Paul Precht,
    director of policy and communications, Medicare Rights Center;
    and Ms. Judith Stein, executive director of the Center for
    Medicare Advocacy.
        We are very grateful for all of you coming to our hearing
    today, and we thank you for being here. And I want to make
    mention of the fact that we're particularly grateful that you
    allow us to share Mr. Merritt's birthday with him and to have
    him here on this special occasion. You wouldn't have wanted to
    be anywhere else on your birthday.
        Mr. Merritt. It really is a dream come true. Thank you.
        Chairman Waxman. OK. Well, you said that without being
    under oath, but the rest of the testimony you all be asked to
    give--it is the practice of this committee that it be done
    under oath. So I'd like to ask you to all stand.
        [Witnesses sworn.]
        Chairman Waxman. The record will indicate that each of the
    witnesses answered in the affirmative.
        Mr. Merritt, as a birthday gift to you, we are going to let
    you start.
        I think you all know the rules. Your prepared statements
    will be in the record in their entirety. We would like to ask
    you to try to limit the oral presentation to 5 minutes. We have
    the clock.

       STATEMENTS OF MARK MERRITT, PRESIDENT AND CHIEF EXECUTIVE
       OFFICER, PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION; RICK
        SMITH, SENIOR VICE PRESIDENT FOR POLICY, PHARMACEUTICAL
     RESEARCH AND MANUFACTURERS ASSOCIATION [PhRMA]; PAUL PRECHT,
    DIRECTOR OF POLICY AND COMMUNICATIONS, MEDICARE RIGHTS CENTER;
       AND JUDITH STEIN, EXECUTIVE DIRECTOR, CENTER FOR MEDICARE
                                ADVOCACY

                       STATEMENT OF MARK MERRITT

        Mr. Merritt. Thank you, Mr. Chairman and Ranking Member
    Davis, the rest of the Members who will be in and out
    throughout.
        My name is Mark Merritt. I am president of the
    Pharmaceutical Care Management Association. PCMA is a national
    association representing America's pharmacy benefit managers.
    PBMs administer prescription drug benefits for more than 200
    million Americans with health coverage. Our clients include the
    Nation's largest public and private purchasers, including labor
    unions, Fortune 500 companies, FEHBP plans, and, of course,
    Medicare.
        First, I would like to thank you, Chairman Waxman, for your
    leadership on health care issues. PCMA is appreciative of the
    opportunity to work with your staff on generic biologics
    legislation and on ensuring generic competition in the
    marketplace, and I am pleased to be here today to testify about
    Medicare Part D and what we do in it.
        To begin, PBMs use a number of tools and strategies to
    maximize value in terms of quality, access and convenience and
    overall drug spending. First, let's talk about PBMs and
    discounts and rebates regarding manufacturers. There, PBMs pool
    the purchasing ability of all our clients and consumers and
    encourage certain kinds of utilization to obtain discounts and
    rebates from brand-name manufacturers.
        First, our panels of independent clinical experts, called
    P&T committees, or pharmacy and therapeutic committees,
    comprised of independent doctors, pharmacists, academics and
    others, inform us of which drugs are appropriate for certain
    therapeutic classes which address particular medical
    conditions. Then we negotiate with manufacturers who make
    competing products within that class.
        The manufacturer which offers the best discounts and
    rebates typically has their drugs placed on formularies at
    lower copays than their competitors. That encourages consumers
    to choose the more affordable drug, although their physician
    can, of course, direct them to another, if clinically
    appropriate.
        While discounts on individual drugs can vary widely,
    overall, manufacturer rebates have decreased drug spending by
    up to 9 percent in FEHBP, according to their report. And I
    believe your new report, if I read it correctly--and I just got
    it, of course--says we save about 14 percent in Part D. But I
    am not sure about that.
        Extracting manufacturer discounts, however, is only one way
    PBMs deliver savings. The majority of our savings that we
    generate results from innovative and aggressive management of
    other components of drug spending.
        First, we create more affordable delivery options, such as
    mail service pharmacy, which can save 10 percent for payors and
    patients alike. Second, we aggressively negotiate more
    economical reimbursement and dispensing fees with drugstores in
    our pharmacy networks. Third, we use formularies, medication,
    therapy management and other tools to increase generic
    utilization and create a more affordable and often safer drug
    mix for patients. Four, we employ drug utilization review
    programs [DUR], to inform patients and doctors when we identify
    unsafe or unnecessarily expensive prescribing patterns. And,
    five, we are constantly developing new innovative tools, like
    electronic prescribing, which improve efficiency, safety and
    savings across the whole system.
        Today, we are proud of our accomplishments in Part D. Costs
    are lower than expected, premiums are as well, generic
    utilization is higher and getting better, beneficiaries have
    broad access to formularies and drugs and have access to over
    60,000 pharmacies.
        Overall, our savings are comparable to those we generate in
    the private sector and for FEHBP plans. Most importantly, of
    course, beneficiaries themselves are highly satisfied with the
    program; and, of course, that is our marketplace.
        There are, however, additional policy options that would
    further enhance our ability to generate savings that I would
    offer for the committee's consideration, some of which have
    been mentioned already today.
        First, we desperately need to create competition among
    biologics by pursuing legislation such as your proposal, Mr.
    Chairman, the Access to Lifesaving Medicines Act. This is the
    fastest-growing component of drug spend and will reach $100
    billion sometime in the next 10 years. We need more competition
    in that space.
        Second, we would ask policymakers to build on the
    groundbreaking new e-prescribing incentives that were just
    passed as part of the physician pay package.
        Third, we would ask you to take a closer look at the six
    classes of clinical concern that have been mentioned earlier in
    which all drugs from all drug makers are mandated for coverage
    in certain classes, therapeutic classes. These are specifically
    important regarding dual eligibles, who are heavy utilizers of
    these drugs.
        And this policy of mandating coverage, again, for all drug
    companies, all drugs in a certain class, we don't believe it
    improves access, but it does make it difficult, more difficult,
    for PBMs to negotiate rebates for drugs in those classes. And,
    again, they account for about 40 percent or more of the
    spending of dual-related spending.
        In fact, the rebates in the six protected classes, we are
    only able to generate about half as much--or half of
    significant rebates as we are in other classes. Because when
    that leverage is taken away from us, it inhibits our ability to
    get the right discounts from the pharmaceutical manufacturers.
        In conclusion, though, I appreciate the opportunity to
    share with you our progress on my birthday and also look
    forward to answering any questions you might have and any
    concerns you might have.
        Chairman Waxman. Thank very much, Mr. Merritt.
        [The prepared statement of Mr. Merritt follows:]

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        Chairman Waxman. Mr. Smith.

                        STATEMENT OF RICK SMITH

        Mr. Smith. Thank you, Mr. Chairman and members of the
    committee. Thank you for the invitation to participate in
    today's hearing.
        My name is Richard Smith. I am senior vice president for
    policy and research at PhRMA, which represents pharmaceutical
    research companies.
        Medicare Part D has greatly improved beneficiaries' access
    to needed medicines, reduced out-of-pocket costs and retained
    broad choice among medicines. This has been accomplished at
    much lower than anticipated cost to beneficiaries and
    taxpayers, and data show that Part D enrollees are highly
    satisfied and they are saving money.
        Last week, Congress adopted an important PhRMA support
    improvement allowing more low-income beneficiaries to qualify
    for enhanced assistance.
        The committee requested that I provide information on the
    nature of financial arrangements between pharmaceutical
    manufacturers and Part D plans, along with the extent of
    discounts. As a trade association, PhRMA maintains a strict
    antitrust compliance policy, so I can neither obtain nor
    discuss our members' proprietary information related to prices,
    negotiations or discount strategies. As a result, my testimony
    reflects only publicly available information.
        Part D was designed to achieve a range of objectives by
    carefully balancing affordability, access choice and improved
    use of medicines. This careful balance requires assessing the
    program on an overall basis, recognizing that its objectives
    are interrelated.
        Part D saves beneficiaries money. Peer-reviewed research
    and government studies report sizable reductions in seniors'
    monthly out-of-pocket costs, and premiums in 2008 are actually
    below the level initially projected for 2006.
        Part D's competitive structure saves taxpayers money. Both
    CBO and the Medicare Trustees report costs are far less than
    anticipated, largely because of vigorous competition. CBO
    concludes plans have ``secured rebates somewhat larger than the
    average rebates observed in commercial health plans.'' And the
    Trustees report states many brand-name prescription drugs carry
    substantial rebates, often as much as 20 to 30 percent.
        I would also note, in the six classes, plans have an array
    of tools used to negotiate savings. In these classes, plans
    have tiers, utilization management and many generics.
        Comparing CBO's 2008 and 2006 baseline shows that projected
    total cost for 2007 through 2016 has dropped by $438 billion,
    or 37 percent. Actual plan bids, the best measure of the
    program's per person cost, are 12.8 percent lower than they
    were 2 years ago.
        Part D offers beneficiaries choice of medicines through the
    medicines covered by individual plans and through choice among
    plans. In fact, two of the largest Part D plans report covering
    all 100 of the most commonly used drugs; and beneficiaries are
    picking plans that combine no deductible, lower-than-average
    premium, and a broad choice of medicines.
        While access to medicines has improved as intended under
    Part D, IMS Health estimates that the program's impact on
    retail pharmaceutical sales was an increase of about 1 percent
    in 2006. And a recent academic study reports that, overall,
    Part D reduced average drug prices, and the trustees have
    reported that rebates increased in 2008. Moreover, drug costs
    growth has slowed since Part D's enactment to 3.8 percent in
    2007, the lowest rate since 1961.
        In assessing the program's cost savings, it is important to
    consider the full range of populations covered and the full
    range of cost-saving tools used. For instance, 14 million
    uninsured or underinsured beneficiaries before Part D did not
    have discounts and rebates routinely negotiated on their
    behalf. Now, powerful purchasers representing millions of
    covered lives each negotiate savings on their behalf.
        And plans use a variety of tools, among them discounts,
    rebates and incentives, to increase generic use to achieve
    savings. As was mentioned previously, 13 of the 15 most
    commonly prescribed drugs in Part D are generic. These tools
    have produced affordable premiums and are largely responsible
    for the overall $438 billion reduction in the program's total
    projected cost.
        In conclusion, Part D has achieved its objectives for
    beneficiaries who clearly recognize its value. Vigorous
    competition has driven down costs, both for beneficiaries and
    taxpayers. Changing Part D's market-based structure would
    undermine the balanced approach which has produced sizable cost
    savings and greatly improved access to needed medicines.
        We look forward to working with the committee to enhance
    the program by building on its successful foundation, and I
    appreciate the opportunity to testify.
        Chairman Waxman. Thank you very much.
        [The prepared statement of Mr. Smith follows:]

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        Chairman Waxman. Mr. Precht.

                        STATEMENT OF PAUL PRECHT

        Mr. Precht. Thank you, Chairman Waxman, members of this
    committee, for this opportunity to testify.
        I am Paul Precht, director of policy and communications for
    the Medicare Rights Center.
        The Medicare Rights Center is a national consumer service
    organization with offices in New York and Washington. Our
    hotline volunteers and caseworkers help older and disabled
    Americans deal with every conceivable type of problem standing
    between them and the health care they need.
        Before the Part D benefit started in 2006, the most
    frequent call came from people with Medicare who could not
    afford to buy the medicines they were prescribed. Today,
    despite the billions in subsidies provided to the insurance
    companies and pharmacy benefit managers running Part D, it
    remains the No. 1 problem we hear.
        A typical call comes from someone making less than $20,000
    a year. More than half of the people with Medicare earn less
    than that amount. They don't have much to live on, but it is
    still too much to qualify for extra help with their
    prescription drug costs.
        Multiple drugs to treat multiple chronic conditions put
    this person in the Part D coverage gap, the donut hole, where
    she--and it is often a widow living alone who calls--must pay
    both the premiums for her Part D drug coverage and the full
    price of her drugs. With a drug bill in excess of $500 per
    month for months on end, on top of medical and other bills, the
    options are few. She can try to get free samples from her
    doctor. She can head for the emergency room. When these
    strategies fail, too often, she may go without the medicine she
    needs.
        Prescription drug prices are just too high, and Part D
    plans are not delivering the lower prices that were promised
    when this benefit was created. They certainly are not providing
    discounts on par with the prices the VA, State Medicaid
    programs, or our neighbors in Canada have secured. That is
    widely acknowledged.
        What is less well-known, however, is that the rebates and
    discounts that the Part D plans have been able to obtain are
    not passed through to consumers in the form of lower prices.
    That means each time a diabetic person with Medicare scrapes
    together the money to buy a $400 specialty drug, the Part D
    plan pockets a $30 or $40 rebate, based on the averages that
    this committee has uncovered. That rebate is not used to lower
    the $100 coinsurance she paid during the initial benefit
    period, and it does not bring down the $400 price she pays
    during the donut hole.
        Plans argue that rebate revenue is used to keep premiums
    down. In effect, under this system, sick people who need
    expensive medicine pay a surcharge to keep costs down for their
    healthier neighbors. It is the opposite of the way insurance is
    supposed to work.
        It is not just brand-name drugs that are too expensive
    under Part D. People with Medicare are also being overcharged
    for generics under some plan D plans. This scheme was described
    in the Wall Street Journal this week. This is how it works.
        The Part D plan, an insurance company, pays its pharmacy
    benefits manager $60, for example, for each prescription of
    generic Zocor that it covers. But the drug really costs only
    $20. The pharmacy receives $15 from the PBM and $5 from the
    consumer. At the end of the month, the consumer gets a
    statement from the PBM saying it spent $55 for the
    prescription, and the customer is $60 closer to the donut hole.
        Consumers who take a few generic drugs that are subject to
    these inflated prices can be pushed into the donut hole 2 or 3
    months earlier in the year. What happens when consumers hit the
    donut hole? Do they pay the $20, the reimbursement rate for the
    pharmacy? They do not. They pay $60, and the pharmacy is forced
    to kick back $40 to the PBM.
        PBMs argue this pricing scheme keeps administrative costs
    down for the insurance companies. But here is the twist:
    Sometimes the Part D plan and the PBM running this pricing
    scheme are part of the same company. In our view, prices are
    being manipulated to gouge both the consumer and Medicare,
    which pays more for the dual eligibles, since they pay the cost
    sharing.
        We are 2\1/2\ years into the Part D drug benefit, and even
    if the administration follows through on its promise to end
    this scheme--and they backed off last time they proposed to end
    it--it will continue through the end of 2009.
        When the insurance industry and the PBMs talk about how
    Part D has marshaled market forces to lower costs, this is the
    market they are talking about. It is untransparent, it is
    rigged against consumers, particularly when they fall sick, and
    it does not deliver the prices consumers could receive if
    Medicare was negotiating with manufacturers and running the
    benefit.
        People with Medicare should have the choice to receive drug
    coverage directly through Medicare. A Medicare plan that, for
    example, could encompass the duals, as a start, would be a good
    way to deal with these overcharges that we are facing.
        Just one last remark. Everybody talks about the
    satisfaction rates with Part D. But those same polls also show
    similar percentages of people want a simpler benefit, they
    would like the option to have coverage under Medicare, and they
    want the government to be able to negotiate lower prices.
        Thank you.
        [The prepared statement of Mr. Precht follows:]

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        Chairman Waxman. Ms. Stein.

                       STATEMENT OF JUDITH STEIN

        Ms. Stein. Good afternoon and thank you, Chairman Waxman.
    Thank you for being here, Mr. McHenry and Congressman Murphy.
        I am Judy Stein. I am testifying today on behalf of the
    Center for Medicare Advocacy, of which I am the founder and
    executive director.
        Since 1977, first at Connecticut Legal Services and then
    when I founded the Center in 1986, I have dedicated my legal
    career to representing Medicare beneficiaries. At the Center
    for Medicare Advocacy, we have represented thousands of
    Medicare beneficiaries and their helpers in Connecticut and
    across the country to understand and utilize Part D. We hear
    repeatedly from them about problems that arise from the
    complexity of the program and its ever-increasing costs.
    Unfortunately, problems go beyond just the dually eligible
    population.
        There are a myriad of plans, each with varying benefit
    structures, formularies, out-of-pocket costs, and it makes
    comparisons all but impossible. Beneficiaries have insufficient
    information to understand formularies, coinsurance, copayments
    and coverage gaps. They lack sufficient information to make
    sound choices. Indeed, the Center has hired an experienced
    advocate who dedicates all of her time just to handle the Part
    D problems just in Connecticut.
        I thank you very much, Chairman Waxman for your leadership
    in investigating prescription drugs and Part D in general and
    Congressman Murphy for all the work he has done in our home
    State and now very happily here in Washington to help Medicare
    beneficiaries across the country.
        Over the past several years, the Center has written
    extensively about the effects on our clients of increased
    reliance on private insurance plans to provide Medicare
    coverage. Those plans lack the stability and uniformity of the
    Medicare program, and they have often decreased, not increased,
    access to care and increased costs.
        Unfortunately, the only way to get Medicare coverage for
    outpatient prescription drugs is through private plans. Our
    clients must decide each year which plan to choose from among
    dozens and dozens with varied cost sharing and coverage rules.
        This is the packet my mother had to look through, and she
    is a relatively well woman who takes only three drugs. It took
    us hours to go through the decisions for her.
        If beneficiaries seek assistance, and if it is available,
    they must divulge private information about their health and
    medications. I don't think this has been thought of at all as
    one the personal expenses of the program. This information is
    something that many beneficiaries do not even want to share
    with their families. And, frankly, I was not aware of the drugs
    my mother took until I had to help her with Part D; and she
    would have preferred I didn't. It is also a step beyond to
    divulge this information to 1-800-MEDICARE representatives or a
    plan operator, and many people don't want to do that.
        As a consequence, the vast majority of beneficiaries,
    because of these problems and others, do not in fact change
    plans from year to year, so the whole issue of choice is
    increasingly becoming a red herring. In fact, 17 percent--only
    17 percent of people chose to switch plans this last year, even
    though it would have been in their best interests oftentimes to
    do so.
        Our clients are subject to the whims of the companies that
    decide to offer drugs to the Medicare program. They must either
    bear the increased costs and reduced access to drugs or go
    through one or another an onerous process, either to choose to
    appeal a decision or to wait until next year when they may be
    able to get a better plan. Because if your health changes or
    the plan changes the drug's pricing or the drugs on its
    formulary, all of which can happen, you cannot get into a
    different Part D plan.
        According to an ongoing study by AARP, any savings in drug
    costs achieved by Part D were achieved through a reduction in
    the cost of generic drugs. However, the prices for 169 brand-
    name drugs went up 50.4 percent between 2001, when the first
    AARP study happened, and 2007.
        Higher drug costs mean that beneficiaries reach the
    coverage gap, or donut hole, sooner. Increased costs are
    causing a terrible impact on our beneficiaries, especially
    those who cannot take a generic equivalent, and that includes
    people with cancer, cardiac problems and other very significant
    illnesses. No stand-alone drug program offers brand-name drug
    coverage during the gap.
        This week, a woman from California e-mailed us telling us,
    ``I am having terrible problems trying to find a way to pick
    the medication for my father's chronic illness. He is diabetic,
    needs chemotherapy for bladder cancer, and has cardiac
    arrhythmia. Between him and my mother, they have only $1,900
    per month, and my father is already in the donut hole.'' That
    was in July. There are 6 more months ahead.
        One of our clients in Connecticut, a 52-year-old woman,
    pays $6,000 a month for her medications, if she could afford
    them, which she cannot. She is on Social Security Disability
    because of her sickle cell anemia. Her prescription drug plan
    refused to provide coverage for the dose needed by this woman,
    even though it was ordered by her physicians, who referred her
    to the Center, and we appealed outside the plan finally and got
    coverage.
        One woman in Tennessee wrote she can't afford and is
    therefore not taking her drugs.
        In conclusion, the program has untold expenses for
    beneficiaries, for States who, like Connecticut, are wrapping
    around and paying for Medicaid beneficiaries and people on
    their State pharmaceutical assistance plans, and are putting
    ever-increasing costs of prescription drugs into the prices
    that taxpayers must pay for Medicare in general.
        In summary, we urge the Congress to take the following
    steps: Include a prescription drug benefit in the traditional
    Medicare program and authorize the Secretary to negotiate the
    cost of drugs within that program at least; require drug plans
    to pass along the fullest extent of their rebates and include
    beneficiaries while they are--and include those rebates when
    beneficiaries are paying themselves in the gap; increase
    transparency by requiring drug plans to make available
    information about their pricing and rebates; increase oversight
    of the Medicare Web page, which is often very different from
    the information given on the plan's Web pages themselves; and
    require CMS to provide greater oversight of the Part D plans in
    their oversight.
        Chairman Waxman. Thank you very much, Ms. Stein. We are
    going to put that whole statement in the record and all of
    those recommendations, which we very much appreciate.
        [The prepared statement of Ms. Stein follows:]

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        Chairman Waxman. I am going to start off the questions.
        Our committee for the first time was able to analyze the
    drug and insurance company proprietary data on drug pricing and
    compare the prices charged to the Medicare Part D program and
    the prices charged to Medicaid, and the findings reveal that
    the private Medicare Part D insurers are paying 30 percent more
    for drugs than the Medicaid program. This has resulted in a
    windfall of over $3.7 billion for the drug manufacturers on the
    sale of drugs to dual-eligible enrollees.
        These elderly and disabled individuals used to get their
    drugs from Medicaid. They have switched to Medicare Part D, and
    now their higher drug prices are costing taxpayers billions of
    dollars.
        Mr. Weems argued that if Medicare Part D got the same
    discounts for drugs that the dual eligibles that Medicaid gets,
    there would be a negative consequence for other Medicare
    beneficiaries. Specifically, he said this could lead to higher
    prices at the pharmacy, compromised incentives to move
    enrollees to generic drugs, undermine utilization management
    activities that plans for important safety protections as well
    as cost controls.
        Ms. Stein, what do you think about what Mr. Weems' concerns
    are that he expressed to us about this issue?
        Ms. Stein. Thank you, Chairman.
        Well, one of the things I think is that I added one of the
    economists who spoke this morning, the figures on the bottom
    line on Mr. Weems' chart, and they came to, I believe, $400
    billion, which I believe was also the original estimate of what
    the program would cost. So it seems to me that I don't
    understand where the savings are in that explanation that was
    given. I think one of the things we often find is that one has
    to add up the numbers and question where they are coming from.
        What I know is that we have 6,500 calls and thousands of e-
    mails every year at this Center. I sit in the real world
    listening to real people. They cannot afford these drugs. They
    are in the donut hole way earlier than was anticipated, and it
    is a problem with them. They cannot afford the drugs, and they
    are not getting the rebate in price when they are in the donut
    hole. Also, the plans don't cover their drugs, more often than
    not.
        Chairman Waxman. Thank you very much.
        Mr. Precht, what do you think of the argument that we are
    really doing a favor for the rest of the Medicare beneficiaries
    by paying a higher price for the dual eligibles?
        Mr. Precht. I am not an economist, but it doesn't make any
    sense to me. It seems that there is money that is going into
    the pharmaceutical manufacturers, rather than into providing
    coverage for people with Medicare; and it certainly seems we
    could use that money to get more people into the extra health
    program, for example, so they wouldn't have to pay full price
    in the donut hole.
        It seems to me that if there were competition between the
    private plans and a Medicare option that negotiated its rates
    that would provide some price discipline and it could result in
    lower prices, both in the Medicare option as well as the
    private option.
        Chairman Waxman. Mr. Merritt and Mr. Smith, do you disagree
    with the report's findings that the manufacturers are charging
    more for drugs under Medicare Part D for dual eligibles than
    they are under Medicaid?
        Mr. Smith. Mr. Chairman, I haven't had an opportunity to
    review the report. It certainly wouldn't surprise me if the
    type of market-based system we have, with very powerful large
    purchasers, lots of tools at their disposal--Mr. Merritt
    described those--negotiated a price that was different than the
    price that was previously set through the administered pricing
    system of Medicaid.
        I think it is important to recognize that the----
        Chairman Waxman. You say because of all the strong tools
    they have they negotiated a price that is higher than Medicaid?
        Mr. Smith. I am saying there might be a valuation in the
    marketplace that is different than the valuation through the
    administered pricing system of Medicaid.
        Chairman Waxman. So you think Medicaid is lower priced, and
    we have moved to a higher price system under Part D through the
    private plans?
        Mr. Smith. Mr. Chairman, without having had an opportunity
    to review the report, I am simply saying that I can imagine
    that private purchasers with lots of tools negotiating come up
    with different valuations than does an administered pricing
    system.
        And when we look at the entire population, including the 14
    million individuals who previously weren't typically having
    discounts and rebates negotiated on their behalf, I think that
    we see that there is considerable price pressure.
        Chairman Waxman. How about just the 6 million that are dual
    eligibles? With all these tools that the private plans have for
    negotiating better prices, why are we paying more for that
    distinct population for their drugs than we were under
    Medicaid?
        Mr. Smith. Well, I believe, first, that private plans
    negotiate for entire populations, so average rebates for entire
    populations may differ than average rebates for a segment of
    the population. They may also use a different mix of savings
    mechanisms. They may use more than rebates of savings
    mechanisms. And, ultimately, I think it is difficult to pull
    the one population out, look at it separately from the entirety
    the population being covered and for which savings is being
    negotiated.
        Chairman Waxman. Would you include the private-sector
    coverage for non-Medicare? Would you put them in the overall
    picture?
        Mr. Smith. I am not quite sure I understand the question,
    Mr. Chairman.
        Chairman Waxman. I will send you a letter about it
    afterwards.
        Mr. McHenry.
        Mr. McHenry. Thank you, Mr. Chairman.
        You know, this committee is trying to find efficiency in
    government, and I appreciate it. It has taken us a while to
    actually get to hearings that get to that during this Congress,
    but I am glad that we can actually have this discussion.
        I do have a question. Mr. Precht, we are speaking about
    Medicare Part D today. But, admittedly, Medicare is a larger
    issue that we are concerned about.
        Ms. Stein, I appreciate your advocacy and help in this
    process and helping American seniors get the information they
    need to make good decisions about this. But, you know, I would
    like to know, because you are concerned about Medicare rights,
    Mr. Precht, are you concerned about the financial adequacy of
    Medicare Part A?
        Mr. Precht. Yes, sir, very much.
        Mr. McHenry. In terms of the amount of money the government
    spends, isn't it far greater in Medicare Part A?
        Mr. Precht. That is correct. There is more money spent on
    hospital care than on prescription drugs.
        Mr. McHenry. Do you think we should be looking at that as a
    Congress?
        Mr. Precht. Absolutely.
        Mr. McHenry. OK. I mean, the price differential between the
    two is significant. It is--what--about $200 billion--$220
    billion for Medicare Part A and about $50 billion for Medicare
    Part D. Is that roughly correct? I am not trying to put you on
    the spot.
        Mr. Precht. I will take your word for it.
        I mean, there is certainly more spending. I guess I don't
    know. I am not as familiar as I should be with research that
    looks at the spending under Part A and whether we could be
    saving money. But I think probably there are ways to save money
    there as well.
        Mr. McHenry. Ms. Stein, to your comment that beneficiaries
    are struggling with ever-increasing prices--and, generally
    speaking, in this time right now of inflation, we are all
    struggling with high prices--gas prices, food prices and
    everything else. It is putting a pinch on seniors, especially.
    But in terms of the Medicare Part D beneficiaries and what they
    pay in premiums, has that gone up?
        Ms. Stein. Yes, sir. In fact, my--for instance, Humana has
    gone up three times what it was in the first year of the
    program.
        And, by the way, with regard to Part A, the Center for
    Medicare Advocacy is extremely concerned about the cost of
    Medicare in general, and we do a great deal of work with regard
    to those issues.
        Mr. McHenry. Sure. Back to the point of what the
    beneficiaries are paying, according to the CBO, the cost
    estimate at the beginning of this program was, I believe, $37
    or $35, and CMS estimated about the same at the beginning of
    the program. I think CMS estimated $37. CBO said $35. In fact,
    the Democrats had an amendment in committee to set the price of
    premiums for seniors at $35. Well, premiums are under $25 right
    now across the population for all beneficiaries, is that not
    correct?
        Ms. Stein. For all beneficiaries, the premiums went down.
    For plans that people were in, they often went up, and they
    didn't switch. So that people were in a plan in the first year,
    their premium went up three times in the second year for one of
    the entities that has the largest population.
        Mr. McHenry. Sure. But there are other entities by which
    they can say, I am done with Humana. I am going over here.
    There are enough forces out there----
        Ms. Stein. Because of the structure of the program----
        Mr. McHenry. Ma'am, let me finish asking the question.
        There are enough in the way of choices out there that
    seniors can make an informed decision; and if on average the
    premiums have gone down, isn't that a good thing?
        Ms. Stein. It depends, sir. In my mother's case, for
    instance, yes, she takes two drugs. She decided to stay in her
    plan because it was a lower premium, she thought. But it didn't
    cover one of her drugs. So you could choose a premium that is
    lower this year but not get your drug coverage. It is as not as
    simple as that.
        Mr. McHenry. Because an individual makes a mistake doesn't
    mean it is a bad policy or bad program. Mistakes are made every
    day. After all, look at the U.S. Congress. We have made
    mistakes. We are all human.
        Ms. Stein. With all due respect, sir, just let me say this.
    There is only 17 percent of people that switched plans. So the
    fact is that people, for whatever reason--I believe the design
    of the program--are not utilizing the choice option because it
    is so complex. And the fact is that, if they do choose based on
    the lowest-cost premium, they may well find themselves in the
    wrong plan.
        Mr. McHenry. OK. Thank you. I appreciate your testimony.
        I have one final question for Mr. Smith, if I may, Mr.
    Chairman.
        Overall, we are talking about price negotiation. That is a
    part of this. And the majority report, the Democrat report from
    this committee, expresses that there will be a ``windfall'' to
    the pharmaceutical industry unless government negotiated the
    price. Even though what they failed to mention is that private
    entities, all these different insurers, are negotiating for the
    price of drugs. So, therefore, they want the government to step
    in and say all these different insurers have to accept this
    price.
        OK. If there is a windfall for the pharmaceutical industry,
    how much has your business gone up? Because the statistic I
    have, in your testimony, is that prescription drug sales have
    increased by only 1 percent since Medicare Part D was
    implemented. Where is the windfall?
        Mr. Smith. Yes, sir. I would, of course, view prices that
    are set by very powerful purchasers negotiating very
    aggressively for prices and the resulting prices as not
    generating a windfall. The basic result has been that, in 2008,
    prescription drug costs in the United States went up by the
    lowest rate since 1961, 3.8 percent, and the slowdown in growth
    continues. IMS Health reports, for the 12 months ended May of
    this year, the growth rate for prescription medicines in the
    United States, the entire cost for the whole country, was 1
    percent.
        Mr. McHenry. Thank you, Mr. Chairman.
        Mr. Murphy [presiding]. Thank you, Mr. McHenry.
        Mr. Smith, I want to get back to followup on a few of
    Chairman Waxman's questions. I know he may followup with you in
    written correspondence.
        But with regard to the differences between the negotiations
    that happened with private plans and the Medicaid rebate
    system, your ultimate leverage in a negotiation with a
    particular health care plan is to not sell that drug to that
    plan, to not be part of their formulary, is that correct?
        Mr. Smith. Without suggesting proprietary information about
    business practices, I think that would generally accurately
    characterize the market.
        Mr. Murphy. With regard to the Medicare rebate system, your
    ultimate leverage with the Medicaid rebate system is to
    voluntarily not sell your drug as a part of the Medicaid
    system?
        Mr. Smith. That is correct. On a one-size-fits-all basis,
    you are really excluded from a very large portion of the market
    entirely, very different from the private sector.
        Mr. Murphy. Because the purchasing pool is so large from
    the Medicaid side, because, as you say, it is a one-size-fits-
    all, the decision is much harder to not sell the drug to the
    Medicaid system.
        Mr. Smith. Well, there is no real opportunity to reflect
    value, because there is that statutory formula that sets the
    price. So I think that one of the challenges is that there
    really is no negotiation in that respect because it is a
    decision that is generated by a statutory pricing formula.
        Mr. Murphy. But you are not compelled to sell the drug?
        Mr. Smith. It is either sell at that statutory formula or
    be excluded from the entire Medicaid market.
        Mr. Murphy. Ms. Stein, the report that is released today
    details a 6.6 percent increase in the average cost of a drug
    from 2006 to 2007, which is about twice the rate of inflation.
    You suggested some of the impacts of this in your testimony.
        But I just wanted to ask you, what is the impact of that
    6.6 percent increase in the price of the drug to an average
    health care consumer in the Part D system, given I think the
    testimony that you have given about the number of people
    falling into the donut hole earlier than expected or earlier
    than people had hoped for?
        Ms. Stein. Sir, they are very often in the donut hole
    earlier. Once they are there, they are paying the full cost of
    the drug, not with the rebate. People, as you will see in my
    written testimony, are taking less than the full prescription
    which has been given by their physician, as someone is quoted
    in my testimony. Particularly people on psychotropic drugs we
    find are not taking their medications. Many of them don't like
    to take them in the first place.
        So we have a lot of problems with the fact that people
    aren't taking the medications or taking less than has been
    prescribed, and they are falling into the donut hole earlier.
        I would also like to suggest there are tremendous costs to
    the States as a consequence, which, as you know in Connecticut,
    we are also paying--when the people fall into the donut hole,
    we are paying those coinsurances. And on specialty drugs that
    can be for the individual as well as for the State up to 33
    percent of the cost of that special brand-name drug.
        Mr. Murphy. The last question, just to make this point
    clear, when an individual falls into the donut hole, when they
    come to pay for the price at the retail pharmacy, they are not
    getting the benefit, certainly not of Medicaid, but they are
    not getting the benefit of the potential discount negotiated by
    the HMO they were covered which?
        Ms. Stein. That is correct. That is included and helps them
    get into the donut hole sooner. Once they are in the donut
    hole, they don't have the benefit of that; and they pay more.
        Mr. Murphy. Thank you, Ms. Stein.
        Thank you very much to the entire panel. We will keep the
    record open for further comments and statements.
        I would like to add without objection for the record a
    statement for today's hearing submitted by America's Health
    Insurance Plans.
        Without objection, that is entered into the record.
        [The information referred to follows:]

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        Mr. Murphy. Again, thank you to this panel. Thank you to
    our previous two panels.
        This hearing is adjourned.
        [Whereupon, at 2:26 p.m., the committee was adjourned.]