[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
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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.]

                                 
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