    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

              FEHBP'S PRESCRIPTION DRUG BENEFITS: DEAL OR NO DEAL?

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

                                    HEARING

                                   before the

                       SUBCOMMITTEE ON FEDERAL WORKFORCE,
                        POSTAL SERVICE, AND THE DISTRICT
                                  OF COLUMBIA

                                     of the

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 24, 2009

                                   __________

                               Serial No. 111-11

                                   __________

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

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

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                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                       EDOLPHUS TOWNS, New York, Chairman
    PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
    CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
    ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
    DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
    JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
    WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
    DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
    STEPHEN F. LYNCH, Massachusetts      LYNN A. WESTMORELAND, Georgia
    JIM COOPER, Tennessee                PATRICK T. McHENRY, North Carolina
    GERRY E. CONNOLLY, Virginia          BRIAN P. BILBRAY, California
    MIKE QUIGLEY, Illinois               JIM JORDAN, Ohio
    MARCY KAPTUR, Ohio                   JEFF FLAKE, Arizona
    ELEANOR HOLMES NORTON, District of   JEFF FORTENBERRY, Nebraska
        Columbia                         JASON CHAFFETZ, Utah
    PATRICK J. KENNEDY, Rhode Island     AARON SCHOCK, Illinois
    DANNY K. DAVIS, Illinois             ------ ------
    CHRIS VAN HOLLEN, Maryland
    HENRY CUELLAR, Texas
    PAUL W. HODES, New Hampshire
    CHRISTOPHER S. MURPHY, Connecticut
    PETER WELCH, Vermont
    BILL FOSTER, Illinois
    JACKIE SPEIER, California
    STEVE DRIEHAUS, Ohio
    ------ ------

                          Ron Stroman, Staff Director
                    Michael McCarthy, Deputy Staff Director
                          Carla Hultberg, Chief Clerk
                      Larry Brady, Minority Staff Director

    Subcommittee on Federal Workforce, Postal Service, and the District of
                                    Columbia

                        STEPHEN F. LYNCH, Massachusetts
    ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
        Columbia                         JOHN M. McHUGH, New York
    DANNY K. DAVIS, Illinois             JOHN L. MICA, Florida
    ELIJAH E. CUMMINGS, Maryland         MARK E. SOUDER, Indiana
    DENNIS J. KUCINICH, Ohio, Chairman   BRIAN P. BILBRAY, California
    WM. LACY CLAY, Missouri
    GERRY E. CONNOLLY, Virginia
                         William Miles, Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 24, 2009....................................     1
    Statement of:
        Kichak, Nancy H., Associate Director for Strategic Human
          Resources Policy Division, U.S. Office of Personnel
          Management; Rear Admiral Thomas J. McGinnis, Chief,
          Pharmaceutical Operations Directorate, Tricare Management
          Activity, Office of the Assistant Secretary of Defense,
          Health Affairs; and John E. Dicken, Director, Health Care,
          Government Accountability Office...........................    68
            Dicken, John E...........................................    85
            Kichak, Nancy H..........................................    68
            McGinnis, Thomas J.......................................    73
        McFarland, Patrick E., Inspector General, U.S. Office of
          Personnel Management; Susan A. Hayes, founder of Pharmacy
          Outcome Specialists; and James G. Sheehan, Medicaid
          inspector general, New York State Office of the Medicaid
          Inspector General..........................................    23
            Hayes, Susan A...........................................    31
            McFarland, Patrick E.....................................    23
            Sheehan, James G.........................................    43
        Needleman, Dr. Jack, associate professor in the Department of
          Health Services of the UCLA School of Public Health; Dr.
          Ralph de la Torre, president and CEO, Caritas Christi
          Health Care; and Mark Merritt, president and chief
          executive officer, Pharmaceutical Care Management
          Association................................................   112
            de la Torre, Dr. Ralph...................................   126
            Merritt, Mark............................................   138
            Needleman, Dr. Jack......................................   112
    Letters, statements, etc., submitted for the record by:
        Connolly, Hon. Gerald E., a Representative in Congress from
          the State of Virginia, prepared statement of...............    60
        de la Torre, Dr. Ralph, president and CEO, Caritas Christi
          Health Care, prepared statement of.........................   128
        Dicken, John E., Director, Health Care, Government
          Accountability Office, prepared statement of...............    87
        Hayes, Susan A., founder of Pharmacy Outcome Specialists,
          prepared statement of......................................    33
        Kichak, Nancy H., Associate Director for Strategic Human
          Resources Policy Division, U.S. Office of Personnel
          Management, prepared statement of..........................    70
        Lynch, Hon. Stephen F., a Representative in Congress from the
          State of Massachusetts:
            Prepared statement of....................................    21
            Prepared statement of Change to Win......................     3
            Prepared statement of the National Community Pharmacists
              Association............................................    11
        McFarland, Patrick E., Inspector General, U.S. Office of
          Personnel Management, prepared statement of................    25
        McGinnis, Thomas J., Chief, Pharmaceutical Operations
          Directorate, Tricare Management Activity, Office of the
          Assistant Secretary of Defense, Health Affairs, prepared
          statement of...............................................    75
        Merritt, Mark, president and chief executive officer,
          Pharmaceutical Care Management Association, prepared
          statement of...............................................   140
        Needleman, Dr. Jack, associate professor in the Department of
          Health Services of the UCLA School of Public Health,
          prepared statement of......................................   115
        Sheehan, James G., Medicaid inspector general, New York State
          Office of the Medicaid Inspector General, prepared
          statement of...............................................    45

              FEHBP'S PRESCRIPTION DRUG BENEFITS: DEAL OR NO DEAL?

                                  ----------

                            WEDNESDAY, JUNE 24, 2009

                      House of Representatives,
    Subcommittee on Federal Workforce, Postal Service,
                          and the District of Columbia,
                  Committee on Oversight and Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 3:03 p.m., in
    room 2154, Rayburn House Office Building, Hon. Steven Lynch
    (chairman of the subcommittee) presiding.
        Present: Representatives Lynch, Cummings, Connolly, and
    Norton.
        Staff present: William Miles, staff director; Aisha
    Elkhesin, clerk; Jill Crissman, professional staff member; Jill
    Henderson, detailee; Daniel Zeidman, intern; Jennifer Safavian,
    minority chief counsel for oversight and investigations; Dan
    Blankenburg, minority director of outreach and senior advisor;
    Adam Fromm, minority chief clerk and Member liaison; Ashley
    Callen, minority counsel; and Molly Boyl, minority professional
    staff member.
        Mr. Lynch. First of all, I'd like to apologize for the
    lateness of our hearing. There are some strategic maneuvers
    being undertaken in the House for other reasons than the flow
    of legislative business, so we are expecting that there may be
    some interruptions in the hearing.
        What I would like to do is to not have that affect your
    appearance here, or the value of your testimony. So if there
    are any disruptions, we will try to ask Members to go and vote
    and come back while we continue the hearing. That is the
    theory, anyway. But let me first call this subcommittee hearing
    to order.
        The Subcommittee on the Federal Workforce, Postal Service,
    and the District of Columbia will now come to order. Welcome
    Ranking Member Chaffetz and members of the subcommittee
    hearing, and all witnesses and those who are in attendance.
        Today's hearing will examine the Federal Employees Health
    Benefits Program, Drug Benefit, and the impact that the lack of
    pricing transparency has on the Office of Personnel
    Management's ability to evaluate the overall value of those
    benefits. The hearing will also discuss alternative pricing and
    contracting methods for the FEHBP's prescription drug benefit.
    The Chair, the ranking member and subcommittee members will
    each have 5 minutes to make opening statements, and all Members
    will have 3 days to submit statements for the record.
        At this time, I would like to ask unanimous consent that
    the testimonies from Change to Win, and the National Community
    Pharmacies Association, be submitted for the record. Hearing no
    objection, it is so ordered.
        [The prepared statement of Change to Win follows:]

        [GRAPHIC] [TIFF OMITTED] T1394.001

        [GRAPHIC] [TIFF OMITTED] T1394.002

        [GRAPHIC] [TIFF OMITTED] T1394.003

        [GRAPHIC] [TIFF OMITTED] T1394.004

        [GRAPHIC] [TIFF OMITTED] T1394.005

        [GRAPHIC] [TIFF OMITTED] T1394.006

        [GRAPHIC] [TIFF OMITTED] T1394.007

        [The prepared statement of the National Community
    Pharmacists Association follows:]

    [GRAPHIC] [TIFF OMITTED] T1394.008

    [GRAPHIC] [TIFF OMITTED] T1394.009

    [GRAPHIC] [TIFF OMITTED] T1394.010

    [GRAPHIC] [TIFF OMITTED] T1394.011

    [GRAPHIC] [TIFF OMITTED] T1394.012

    [GRAPHIC] [TIFF OMITTED] T1394.013

    [GRAPHIC] [TIFF OMITTED] T1394.014

        Mr. Lynch. Again, because of the irregularities on the
    floor, we are going to proceed with as many Members as we have
    available. First of all, I would like to welcome all of our
    witnesses, and the fellow Members who will attend, eventually,
    as we examine this prescription drug benefit in the Federal
    Employees Health Benefits Program.
        I would also like to thank all of today's witnesses for
    sharing their insight and expertise on this complex issue. I
    understand that several of you have come from quite a distance
    to be here with us today, and I deeply appreciate your
    willingness to help the subcommittee gain a better
    understanding of how the Federal Employees Health Benefits
    Program prescription drug benefit is structured and priced.
        The Federal Government is currently facing one of its
    largest policy issues to date, health care reform. This issue
    affects everyone and many challenges must be addressed in the
    upcoming months to find the right solutions. Many policymakers
    look to the Federal Employees Health Benefits Program as a
    model for providing health care. That is why it is important to
    ensure that the program is providing the best quality in
    benefits at the best price.
        Entitled, ``Federal Employees Health Benefits Program
    Prescription Drug Benefits: Deal or No Deal,'' we have called
    for this afternoon's hearing to examine the contracting method
    used to deliver prescription drugs to the 8 million Federal
    employees, their dependents and annuitants and the Members of
    Congress, and their families that are covered under this
    program. Considering that prescription drug costs make up close
    to 30 percent of our program premiums, we need to do all we can
    to ensure that Federal employees, and the taxpayers, are
    getting the best value for their dollar.
        Astonishingly, limited reviews or analyses have been
    performed on this increasingly expensive benefit, but that will
    change, starting today. For the most part, the Federal
    Employees Health Benefits Program Health Plans, contract with
    pharmacy benefit managers to price and provide the pharmacy
    benefit to Federal Employees Health Benefits Plan members.
        In contrast with other Federal health programs, the Federal
    Employees Health Benefits Plan does not regulate or negotiate
    drug pricing for its members. Instead, it relies on the
    competition among various carriers and pharmacy benefit
    managers to keep prices low.
        However, as we will hear today, prices are not low. In
    fact, when comparing the Federal Employees Health Benefits
    Program drug prices to that of other Federal programs such as
    the VA and the Department of Defense, Medicare, Medicaid and
    the Public Health Service 340(b) Program, we will hear that
    along with the Medicare Part D, FEHBP is paying substantially
    more for its drugs than the other Federal programs.
        Now some research even shows that COSTCO and DrugStore.com
    offer better prices for drugs than the Federal Employees Health
    Benefits Program. That is in spite of the fact that the Federal
    Employees Health Benefits Program has the buying power of 8
    million members. That is especially troubling. In these
    economically challenging times, we shouldn't be asking Federal
    employees and the American taxpayer to accept this. If the
    Federal Employees Health Benefits Plan wants to remain a model
    for providing health benefits, legislative changes that allow
    for alternative prescription drug benefit contracting and
    pricing are in order.
        The key question we hope to explore today is, why is the
    Federal Government, and therefore the taxpayers, paying such
    different amounts for the same drug. And I am not an expert on
    pharmaceutical pricing, but I have a hunch that the
    pharmaceutical industry charges what they can to make the
    largest profits.
        For the first 6 months of 2006, the 10 largest drug
    manufacturers enjoyed profits of close to $40 billion. So, do I
    think that the pharmaceutical industry could afford to charge
    lower prices for our Federal employees? I certainly do. As
    chairman of this subcommittee, I am committed to providing the
    best benefits to our Federal employees at the best price. And
    we in Congress have asked a lot of taxpayers in the last few
    months to help us out with that very function.
        We have a responsibility to make sure every dollar that is
    spent is necessary and is providing the greatest benefit.
    Again, I thank all of those in attendance, and I look forward
    to hearing from today's witnesses.
        Normally I would yield to Mr. Chaffetz. I will, of course,
    afford every courtesy to Members as they arrive. So even though
    we may have to skip forward in the proceedings, I will
    certainly recognize the ranking member, and my other colleagues
    as they do arrive.
        It is this committee's policy that all witnesses submitting
    testimony to this subcommittee are to be sworn. May I please
    ask you to rise and raise your right hands?
        [Witnesses sworn.]
        Mr. Lynch. Let the record indicate that the witnesses have
    answered in the affirmative. Your entire written statement will
    be entered into the record. You don't have to worry about that.
    However, during your oral testimony the green light before you
    in that little box indicates you have 5 minutes to summarize
    your statement. The yellow light means that you have 1 minute
    remaining to complete your statement, and the red light
    indicates your time for remarks has ended. So we will proceed
    with the testimony.
        Let me first offer brief introductions of our first panel
    of witnesses, who again, I appreciate your attendance. Mr.
    Patrick McFarland was nominated Inspector General of the Office
    of Personnel Management in 1990. As Inspector General, Mr.
    McFarland is responsible for providing leadership, that is
    independent, nonpartisan and objective, and is dedicated to
    identifying fraud and mismanagement in programs administered by
    the Office of Personnel Management. Mr. McFarland is also a
    member of the Counsel of Inspectors General On Integrity and
    Efficiency.
        Ms. Susan Hayes is the founder of Pharmacy Outcome
    Specialists [POS], with 28 years of experience in the health
    consulting and management industry. Before founding Pharmacy
    Outcome Specialists, she was a vice president of marketing for
    Systemed Pharmacy, Inc., and vice president of marketing for
    Walgreens Healthcare Plus. Ms. Hayes was the national practice
    leader for William M. Mercer, Inc., specializing in
    prescription drug auditing and bid procurement, amounting to
    over $1 million annually in revenue.
        Our next witness, Mr. James Sheehan, has served as New York
    State Medicaid inspector general. He has been the associate
    U.S. attorney for civil programs in the Eastern District of
    Pennsylvania. Mr. Sheehan has focused on health care fraud
    since 1987, having personally handled, or directly supervised,
    over 500 health care fraud matters from 1999 to 2006. Mr.
    Sheehan led the Federal Government's investigation in a case
    against Medco Health Solutions, which resulted in the recovery
    of over $155 million, as well as substantial business changes
    to protect patients and pharmacists.
        [The prepared statement of Hon. Stephen F. Lynch follows:]
        [GRAPHIC] [TIFF OMITTED] T1394.015

        [GRAPHIC] [TIFF OMITTED] T1394.016

        Mr. Lynch. Already, I am being asked to vote. Having no
    other Members here that might be able to do this while I vote,
    I am going to have to ask you to just hang in there, relax. I
    will be back momentarily. Thank you. We are in a brief recess.
        [Recess.]
        Mr. Lynch. This hearing of the subcommittee is now
    reconvened. We will hear from each of our witnesses. Mr.
    McFarland, you are now recognized for 5 minutes for your
    opening statement.

      STATEMENTS OF PATRICK E. McFARLAND, INSPECTOR GENERAL, U.S.
      OFFICE OF PERSONNEL MANAGEMENT; SUSAN A. HAYES, FOUNDER OF
     PHARMACY OUTCOME SPECIALISTS; AND JAMES G. SHEEHAN, MEDICAID
       INSPECTOR GENERAL, NEW YORK STATE OFFICE OF THE MEDICAID
                           INSPECTOR GENERAL

                   STATEMENT OF PATRICK E. McFARLAND

        Mr. McFarland. Mr. Lynch, Ranking Member Chaffetz and
    members of the subcommittee, good afternoon. My name is Patrick
    McFarland. I am the Inspector General of the U.S. Office of
    Personnel Management. I want to thank you for inviting me to
    testify at today's hearing, and especially for recognizing the
    significance of pharmacy manager contracts and their lack of
    price transparency in the context of the Federal Employees
    Health Benefits Program.
        I am pleased to be appearing with my fellow panelists. Mr.
    Sheehan is particularly well-known to my office, as we had the
    privilege of participating in a number of health benefit fraud
    cases, some of which addressed instances of wrongdoing by PBMs,
    that he conducted during his tenure as the associate U.S.
    attorney in the Eastern District of Pennsylvania.
        We found both his expertise on these matters and his
    leadership in complex, high-value cases to be unparalleled.
    Similarly, key members of my staff, who are responsible for
    auditing the Federal Employees Health Benefits Plans, and their
    PBMs, have attended training programs conducted by Ms. Hayes'
    firm. They speak very highly of the training.
        The FEHBP is the largest employer-sponsored health
    insurance program in the United States. During calendar year
    2008, the 266 insurance plans under contract to the FEHBP
    provided health insurance coverage to approximately 7.7 million
    persons, representing Federal employees, annuitants, and
    dependents. The Federal Employees Health Benefits Program paid
    a total of $35.9 billion in premiums to these carriers. As
    reported to OPM, by FEHBP carriers, pharmacy costs reflected
    more than 25 percent of health care costs paid by the fee-for-
    service plans.
        According to data furnished by OPM's contracting office, 12
    different PBMs provided services to one or more FEHBP plans
    during 2008. My office has been addressing PBM issues from both
    an audit and investigative prospective since 2003. We were
    initially concerned that the health and safety of persons
    covered by the FEHBP may have been placed at risk by certain
    practices of PBMs.
        As a result of our timely law enforcement efforts, we
    addressed and resolved these concerns without direct harm to
    FEHBP-covered persons. At this time, we have no information
    which suggests that PBMs under contract with the FEHBP are
    operating in a manner that would compromise the well-being of
    covered persons. However, the prior violations are a strong
    reminder that the potential for safety risks to subscribers
    exists through poorly written contacts, lack of adequate
    industry oversight and the need for additional internal
    controls.
        Currently in my office's estimation, the single-most
    important issue involving the PBMs, is that their contracts
    with the FEHBP carriers are not transparent, and do not reflect
    the actual costs of drugs to the PBM. My office is committed to
    providing the oversight needed to protect the integrity of
    FEHBP and the integrity of its enrollees.
        Thank you again for inviting me here today. I will be happy
    to answer any questions.
        [The prepared statement of Mr. McFarland follows:]

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        [GRAPHIC] [TIFF OMITTED] T1394.020

        [GRAPHIC] [TIFF OMITTED] T1394.021

        [GRAPHIC] [TIFF OMITTED] T1394.022

        Mr. Lynch. Thank you, Mr. McFarland.
        Ms. Hayes, you are now recognized for 5 minutes.

                      STATEMENT OF SUSAN A. HAYES

        Ms. Hayes. Good afternoon, Chairman Lynch and members of
    the Subcommittee on Federal Workforce. I want to thank you for
    the opportunity to testify in front of you and answer your
    questions this afternoon.
        My name is Susan Hayes and I am a principal with Pharmacy
    Outcomes Specialists. In preparing my testimony today, I
    examined the problems encountered by Federal and State
    governments when contracting for pharmacy benefits. I see three
    major issues. Let us take these issues one at a time.
        The pricing of prescription drugs is overly complex and
    hidden to purchasers, designed to confuse plan sponsors, and in
    turn, disadvantage plan sponsors in the negotiation process.
    Prices of prescription brand drugs, are based on discounts off
    Average Wholesale Price or AWP. The source of AWP pricing is
    primarily two pricing guides, which may charge as much $25,000
    per year to subscribe to obtain AWP prices.
        AWP prices may change on a daily basis and are complicated
    by the fact that a single drug may have over 50 prices due to
    different strengths, package sizes and manufacturers. As a
    result, plan sponsors, such as OPM, have to pay exorbitant
    amounts, or hire auditors such as POS, to determine if they
    have been charged correctly and in accordance with the discount
    arrangements with their PBMs.
        Prices for generic drugs are even more secretive. Each PBM
    sets a MAC list, Maximum Allowable Cost, which is closely
    guarded, which is not routinely given to clients and for which
    auditors must sign stringent non-disclosure agreements to
    obtain. MAC prices may vary by the day, the pharmacy or between
    clients of the same PBM. In fact, each PBM may have over 50
    different MAC lists. Auditing these prices are complicated,
    even for the most experienced auditors, and impossible for plan
    sponsors.
        Contracts between PBMs and plan sponsors, even the largest
    plan sponsors such as OPM, do not adequately disclose when PBMs
    realize revenue, and as a result, disadvantage plan sponsors in
    the negotiation process. In a recent decision, the First
    Circuit Court of Appeals observed: ``The health benefit
    provider often has no idea that a PBM may not be working in its
    interests. This lack of awareness is the result of the fact
    that there is little transparency in a PBM's dealings with
    manufacturers and pharmacies.''
        Essentially, these contracts do not disclose the following:
    one, there are additional moneys or margins, perhaps as much as
    5 percent of the drug spend, that are retained by PBMs; two,
    often as much as 50 percent of drug manufacturer rebate
    payments are never passed back to plan sponsors, but are
    retained by the PBM. PBMs come up with different names for
    these rebates, such as cost effectiveness rebates, formulary
    rebates and market share rebates, and then the PBM determines
    how to divide up the pie of rebate and retain what they want
    and pass back to plan sponsors what the PBM thinks that the
    client expects, without the client knowing that there is more;
    three, patient drug histories and physician prescribing
    patterns are routinely sold to drug companies for profits by
    PBMs without physicians, patients or plan sponsors' knowledge
    or approval and without compensation by the plan sponsor or
    patient.
        The lack of transparencies in PBM contracting is
    exacerbated by PBM's resistance to disclose this information,
    disclosure of public information, even when the disclosure is
    required by State sunshine laws. For example, one PBM has
    brought at lease 11 separate lawsuits seeking to block the
    release of its contract covering public employees in Texas,
    even after the Texas attorney general issued legal opinions in
    each instance, stating that the PBM contract at issue should be
    released as a public document.
        Contracts between PBMs and plan sponsors, limit plan
    sponsors' ability to audit these contracts and disadvantage
    plan sponsors from verifying if contract terms are met. Among
    the most insidious of these terms is mutually acceptable
    auditor. For Caremark, Medco and ExpressScripts, who together
    control a majority of the market, a mutually acceptable
    auditor, may be one that is not experienced with rebate
    contracts, AWP sources or PBM policies and procedures, or ones
    that are too expensive for most plans to afford.
        Chairman Lynch, I was surprised to see that your invitation
    letter to me stated that Federal costs for pharmacy benefits
    are 30 percent of total health care spending. Normally, I would
    see pharmacy costs as 20 percent of total health care, and I
    would conclude that your program is really, no deal.
        I am hopeful that the Government will reform its
    contracting processes in the upcoming rebidding of several
    FEHBP plans, and I'm asking for the following measures: full
    transparent contracting for PBM services; pricing terms that
    are clear; AWP brand pricing information becoming readily
    available to plan sponsors; and PBM forced to publish MAC
    pricing for generics; rebate payment sources and types of
    rebate payments received by PBM fully disclosed; data selling
    of any kind associated with health care product spending or
    pharmacy data, should require the explicit approval of plan
    sponsors, physicians and patients; and that the plan sponsor
    selection of a qualified auditor should not be routinely
    thwarted by PBMs; and all plan sponsors should have the ability
    to fully audit all aspects of the PBM contract.
        One again, I thank you for the opportunity and will
    entertain any questions you have.
        [The prepared statement of Ms. Hayes follows:]

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        [GRAPHIC] [TIFF OMITTED] T1394.030

        [GRAPHIC] [TIFF OMITTED] T1394.031

        [GRAPHIC] [TIFF OMITTED] T1394.032

        Mr. Lynch. Thank you, Ms. Hayes.
        Mr. Sheehan, you now have 5 minutes.

                     STATEMENT OF JAMES G. SHEEHAN

        Mr. Sheehan. Thank you, Chairman Lynch, and members of the
    subcommittee for the opportunity to speak to you here today.
        I also want to join, and I also really appreciate the
    opportunity to speak with Inspector General McFarland, who I
    have dealt with over a number of years, and is a leader in the
    Inspector General community, both on professional standards on
    these prescription drug issues.
        What I would like to talk to you about today is my two
    experiences. One is in doing health care fraud cases with the
    Inspector General of OPM, where we were looking historically at
    what had happened within the OPM program and ended up
    recovering close to $300 million from the companies and
    requiring major changes in their business practices.
        And the second set of experiences in New York State,
    working with the Unitary System, where we would have one payer
    for prescription drugs and one data base that allows us to look
    at what is going on with the patients across the board. And I
    guess, like a lot of your witnesses, I have a five-point plan
    which I am going to do in 4 minutes.
        The first part is, it seems to me OPM needs access to and a
    plan for use of integrated patient claims data, which includes
    drug data. We are going to talk today about costs and pricing,
    but the most important information about prescription drugs in
    addition to their costs, is what happens to the patients who
    take them. Do they experience better outcomes? Do they suffer
    adverse events? What is the cost to the patient? And assist
    them with those adverse events.
        If you have these things parceled out through your,
    whatever number of plans that it is, over 100 plans, you are
    not going to have that data available to do the kind of
    analysis to see what the benefit is to the patient, and what
    the potential harms are, and kind of costs you are incurring
    for the drugs themselves and for the adverse events.
        In New York State, we are a national leader in Medicaid
    data management, and in fact, most of the State Attorneys
    General who have worked on the drug cases, have used New York's
    data as their gold standard, to see what is actually happening.
    The same opportunity exists with OPM, it could be the gold
    standard in terms of data. OPM is a lot more experienced with
    drugs and drug payments than any other agency in the Federal
    Government, with the possible exception of the DOD.
        The second issue is to take a look at identified drug
    risks, and there is data available to do that. That is laid out
    in my written comments. The third issue is focusing on drug
    pricing. Drug pricing within OPM's Health Plans was based,
    during the time I was working on reviewing it, upon percentage
    discounts off of average wholesale price, known in the trade
    as, ain't what is paid, and negotiated by the experience-rated
    plans with relatively little OPM oversight.
        The net prices that we saw OPM paying, significantly exceed
    the net prices paid by State Medicaid programs, by DOD, and in
    certain cases, the programs which are run by private companies,
    like HMOs, that didn't appear to be a reason for that. The
    Federal supply schedule, as you will hear later, works very
    well with DOD, and could be used in the OPM context as well.
        The fourth issue that I would like to focus on is
    coordination of benefits between OPM plans and Medicare Part D
    plans. At the moment, one of the issues that we have seen in
    New York is you have to go very carefully to look at what,
    since Medicaid is the payer of last resort, and in certain
    circumstances OPM may be. Who has first responsibility for
    these charges and what kind of prices should they be charged?
        And we have begun in the last year to obtain access to
    billing and payment information from those PBMs. I know the DOD
    is doing the same thing. I know OPM has the same potential. We
    have seen it is a significant dollar potential to recover. And
    also what happens to the patients is they may end up missing
    out on the doughnut hole if it is properly treated.
        The fifth issue that I would focus on, is one Ms. Hayes
    raised, which is the choice of auditor and access to
    subcontractor PBMs. When you have a 100 plus plans, it is very
    hard to audit all of them. And when I was working with OPM on
    the contract side, it was very hard to figure out who the
    specific plans were, what specific subcontractor was used in
    each case. And each contract was different. So you needed a
    different auditor with a different set of information, and they
    were very aggressive at attempting to block certain auditors
    who were knowledgeable from looking at the program.
        When I look at these programs with OPM, I believe there is
    significant opportunities for cost savings on prescription
    drugs through improvements in OPM operations, and a
    consolidation of the PBM contracts that exist. And as
    important, there are opportunities for better patient outcomes,
    more appropriate prescribing and reduced adverse events through
    integration and medical claim and diagnostic data, with
    pharmacy data maintained by the PBM subcontractors.
        Thank you very much, Mr. Chairman, for the opportunity to
    speak today.
        [The prepared statement of Mr. Sheehan follows:]

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        [GRAPHIC] [TIFF OMITTED] T1394.039

        Mr. Lynch. Thank you, Mr. Sheehan. I now yield to myself 5
    minutes.
        Let me ask, we handle the purchase of our acquisitions
    through DOD and other entities, much differently than we do the
    purchase of pharmaceuticals. Maybe this is naive of me, but why
    wouldn't we just make the purchase of pharmaceuticals subject
    to the normal regulated acquisitions process?
        Mr. McFarland. That is, as a matter of fact, one of our
    suggestions that we are able to do that. We have certain
    proposals that we offer. One would be to have the Federal
    regulation changed in the FEHBP Act by Congress, of course, so
    that the PBMs would be considered subcontractors, rather than
    providers.
        Because right now, they are really in concert with a doctor
    or a small pharmacy as a provider. And, in fact, they,
    multibillion dollar corporations, that are operating in a
    manner that we think would be certainly reasonable to have them
    considered a subcontractor. And by virtue of doing that, we
    would have the transparency that we need, and we would have the
    detail. We would get as close as possible to the actual cost.
    But short of that, that is the situation.
        Mr. Lynch. OK. Ms. Hayes, do you have any thoughts on that,
    about following this payment system and acquisition system
    through the Federal Acquisition Regulations?
        Ms. Hayes. Well, I agree with Mr. McFarland and his
    position that these prices should be available to OPM and the
    Federal employees. Again, I think that even if AWP, Average
    Wholesale Prices, is used as the basis, pricing should be
    available to the public so that AWP information can be
    monitored routinely, rather than having it so secretive, and
    having it be bought, and really not have this information
    available. So I agree that Federal employees should get the
    same pricing as DOD and other Government agencies. But even if
    that isn't taken, I think that AWP and certainly MAC pricing
    under generic, should be available to the public to understand
    what those costs are.
        Mr. Lynch. Mr. Sheehan.
        Mr. Sheehan. The difficulty that we encountered was the
    requirement for statutory change, and that did not appear to be
    likely to happen in the near future.
        Mr. Lynch. OK. Let's see, I still have a minute and a half
    left. In trying to dig down and understand this whole process.
    It is unbelievable the needless complexity of this whole
    system. It is built to thwart oversight. It is built to
    introduce as much complexity into the system as it possibly
    can. It is a scam of major proportions.
        There is no reason that this health plan should have to
    operate like this. It is a disgrace. And in this day and age,
    when we are trying to save billions of dollars to fund this
    health care reform, this is an area that absolutely has to be
    cleaned up. This is a mess. It is shameful what is going on.
    And it is going to take a while, but we are going to get to the
    bottom of this. We are going to change this system. I promise
    you. So that is about all I have for time on this pass, but I
    will gladly recognize the gentle lady from the District of
    Columbia, Ms. Eleanor Holmes Norton, for 5 minutes.
        Ms. Norton. Thank you, Mr. Chairman, and what a find you
    have before us here. I am trying to understand just as you are,
    how we could have taken this route. Let me try to cut to the
    chase, Mr. McFarland. If you were looking at this system,
    wouldn't you have to conclude that OPM simply patterned its own
    drug program for Federal employees on what the Federal
    Government was doing in the private sector. Isn't this simply
    the attempt to recreate what that program, and how that program
    was structured?
        Mr. McFarland. To recreate the private sector?
        Ms. Norton. The program for non-Federal employees, I am
    asking whether this is not simply an imitation of that program?
        Mr. McFarland. Well, my feeling about that, Ms. Norton, is
    that in 1959 when the Federal Employees Health Benefits Act was
    passed, it was very clear, very concise as to what was expected
    of OPM. Basically, OPM has stuck very close to that and not
    tried to go outside of any reasonable bounds, inasmuch as----
        Ms. Norton. Well, let me challenge you on that. Let me ask
    you, whether or not this program is modeled on similar programs
    already in the Federal sector? Like the program established for
    decades now for veterans. Wasn't there a clear precedent as to
    how to go about doing this?
        Mr. McFarland. What the Veterans Administration is doing,
    seems to be a very expeditious way of doing it, and that is one
    of our suggestions, that we might want to look at operating
    from the----
        Ms. Norton. Well, I am challenging you Mr. McFarland, when
    you said, all they did was try to follow what they have been
    doing. It seems to me, what the Veterans Administration is
    doing is more closely related to what one would have expected
    of the Federal Government. Here we had a brand new humongous
    program, the first thing you look for is, do I have something
    to guide me. Here you have a Federal agency, that has been
    doing it forever, you put that aside and proceed. I don't
    understand why that precedent was not relevant.
        Mr. Sheehan.
        Mr. Sheehan. Yes, ma'am.
        Ms. Norton. Do you believe that precedent should have
    anything to do with what was happening here, or was there no
    analogy between the Veterans Program and this program?
        Mr. Sheehan. We explored the Veterans Program and the
    Medicare Part D Program, and the OPM Program. I think that
    Inspector General McFarland is correct, that what has happened
    is that the model that was used was the private sector model.
    But, many major companies are doing a better job now in
    identifying these costs and controlling them and dealing with
    them than we are in the Federal Government.
        Ms. Norton. I recognize this. If you look at our FEHBP, it
    deals with individual plans, and they do the negotiation. I
    don't remember people coming back saying they weren't getting a
    good deal. Is the reason that they don't come back and say they
    are not getting a good deal, because of oversight by OPM, Mr.
    McFarland? We have not had this complaint, so far as I know,
    among the FEHBP health programs, that you say is the model for
    this program.
        Mr. McFarland. We, in our office, exercise our audit and
    our criminal investigative efforts in this regard all of the
    time. This is what we do the most of in the health care that
    services the Federal Government. So, I am not quite sure the
    best way to answer your question, because all of our efforts
    are going toward resolving these conditions. And we have our
    options and suggestions that we are providing to OPM for
    consideration.
        Ms. Norton. Well, we appreciate your work, and if the
    chairman will bear with me for just one more question.
    Understand we are trying to see what is appropriate for
    oversight here for the agency to do. I don't recall hearing of
    complaints about people who were pressured to move from one
    insurer to another.
        But yet in this situation, there have been complaints of
    quite unusual, at least in the Federal sector, actions such as
    pressure to move one's prescription from a pharmacy to the
    larger pharmacy. I don't recall that in FEHBP we have had that
    kind of situation occur, and I wonder if you have seen that,
    and what you think of that and what can be done about it?
        Mr. McFarland. Well, certainly when the health carriers
    negotiate their contracts with the PBMs what they are
    attempting to do is get the best price for the prescription
    drugs. And they are----
        Ms. Norton. But the reports are that, in some cases, the
    cost to consumers has risen significantly. There wouldn't be
    any complaints, sir, if the same kind of economies of scale you
    get from mega stores were available here. But there have been
    complaints, and I am trying to find out what went awry here and
    what we can do about it. Because it is new in that system as
    far as I can tell.
        Mr. McFarland. Well, first of all, what it would take would
    be Congress to amend the FEHP Act so that certain things, such
    as you are suggesting can happen, and there can be more
    economies of scale.
        Ms. Norton. So you would recommend that?
        Mr. McFarland. Yes.
        Ms. Norton. Yes, sir.
        Mr. McFarland. That is one of our considerations. Yes.
        Ms. Hayes. I would recommend that. One of the things that
    you asked was, is this patterned after private industry? And a
    lot of my clients are private industry. One of the things that
    private industry would never do, is divide up their negotiation
    power over 100 different contracts. OPM divides up their
    negotiation power over 100's of different contracts through
    health insurers, to the PBMs. And private industry would never
    do that. Private industry would use whatever leverage it had
    with its number of employees with one given PBM.
        Ms. Norton. Why don't they do that, Mr. McFarland? Isn't
    that really economies of scale? You are the biggest player in
    the market, that is what you have going for you. Why aren't you
    using that strength? Why aren't we using that strength the way
    the Veterans Department uses that strength?
        Mr. McFarland. Ms. Norton, the situation, as I see it, is
    somewhat simplified. And that is that from the beginning, in
    1959, the FEHBP has operated by not going outside of bounds.
    They have a certain clarity that they are trying to stay within
    those bounds, as far as dealing with providers. They basically
    don't do that. They have contracts, OPM has contracts with 266
    health carriers at the present time. And the health carriers
    then devote their time negotiating contracts with PBMs. PRMs,
    in turn, negotiate their time with----
        Ms. Norton. Mr. Chairman, I won't take up more time, but I
    do want to say, your testimony then is you do not believe they
    had the power to do that? Are you saying----
        Mr. McFarland. Well, they do not have the power without
    Congress----
        Ms. Norton [continuing]. That they did not have the power
    to do what the Veterans Administration does, use the leverage
    of the Federal Government to reduce the costs to Federal
    employees, and that if we want that to happen, we should change
    the law? Is that your testimony?
        Mr. McFarland. If you change the law, or OPM can do the
    Federal regulation change----
        Ms. Norton. That is a very important ``or.'' That is a very
    important ``or,'' Mr. Chairman. Or if OPM was interested in
    looking at the system, a brand-new system for us, in terms of
    getting the best deal, they do have the regulatory power to do
    so?
        Mr. McFarland. Yes.
        Ms. Norton. Thank you, Mr. Chairman.
        Mr. Lynch. Thank you.
        Let me ask, sort of following up on Ms. Holmes Norton's
    question, we have a plan that represents 7.7 million people, a
    lot of buying power there. In your own experience, do you feel
    like we are using that leverage to demand the best deal. Sort
    of the title of this hearing, Deal or No Deal. Are we getting a
    good deal, Mr. McFarland? Do you feel, based on the leverage,
    that we should have with 7.7 million participants and the
    position that we have?
        Mr. McFarland. We are concerned, Mr. Chairman, that we
    probably are not getting a good deal. There is a good chance
    that we are not getting a good deal, because of the lack of
    transparency. And when I say lack of transparency, I want to be
    more specific. We can't find out information such as the
    incentive pay, the rebate pay, volume discount pay,
    administrative fees. We can't find that information out because
    we can't audit that. It is not available to us now.
        Mr. Lynch. Right.
        Mr. McFarland. We can carve out something from the FEHBP,
    specifically the prescription drugs. We can carve that out and
    go after that. And then we have a tremendous amount of
    enrollees to make a difference. You are correct.
        Mr. Lynch. Do you want to comment on that? It is very
    difficult to conduct an audit on this system. I am talking
    about professional auditors going in there, because all of this
    stuff is so opaque, and it has been made so complex. There has
    been a deliberate attempt to build a system that is not
    auditable, and they have basically created that. It is a very
    frustrating situation here.
        In this hearing process, what I am trying to do is to
    figure out whether we can introduce transparency on the
    existing system, or simply blow it up. Blow up the system, put
    them under the Federal acquisition regulations. Whole new ball
    game, because I am tired of this going on, where our auditors
    can't go in there. I can't even figure out the costs of
    manufacturing it, what their markup is, where the rebates are
    going.
        You would think that the entity that actually generates the
    usage and the volume of these pharmaceuticals would earn the
    rebates themselves. I think, based on the evidence that we have
    had in so far, about 50 percent of the rebates go somewhere
    else. Maybe they go to the PBMs or some other groups, but they
    are not coming back to these Federal employees. And that is
    totally unacceptable.
        So I am trying to figure out whether it is better to try to
    fix this system, and I am not so sure it is. Because the
    complexity is there and it may take too long to do some of
    these things. It may be better to just simplify things, get it
    into an existing system, and let it all shake out there. And
    that system requires transparency. Your own thoughts, Mr.
    McFarland?
        Mr. McFarland. Yes, when I answered before, this is exactly
    what I was getting at when I said it will take a change by the
    Congress. And we can carve out something that could be done,
    but it would take an amendment from the Congress. What we also
    can do, is the FAR regulation could be done by OPM, and they
    could do that and allow us to get in and take advantage of it
    like DOD does and Veterans Administration, Public Health
    Service and the Coast Guard.
        Mr. Lynch. Right. One of the other frustrating parts of
    this is the Average Wholesale Price or the MAC, the Maximum
    Allowable Cost. It is tough to dig down and figure out what the
    hard numbers are in terms of what we are being charged for 7.7
    million beneficiaries. But I do have the ability to compare
    system to system, and when I look at the VA system that I am
    involved with, it looks like they are getting a discount from
    the Average Wholesale Price of somewhere between 55 and 65
    percent. That is the discount I am seeing at the VA.
        Now I have 7.7 million Federal employees, and I would say
    the average discount they are getting maybe 12 to 15 percent,
    somewhere in that range. Now I could understand if there were
    comparable discounts here, if one was at 45, the other one is
    at 55. But going from 60 percent to 12 percent, it just
    amplifies the sense that the Federal employees are getting a
    raw deal on this plan.
        I have exhausted my time. If I could allow you to answer
    though, there are only a few Members here so I am sure
    everybody will be given ample time. Ms. Hayes do you have
    anything, in terms of comparing system to system? You have a
    lot of experience in this. I thought your written testimony was
    very powerful, and I thought you spoke very plainly, and the
    little bit of testimony from the professional side, that I
    could actually understand, and I appreciate that. Your sense of
    whether or not there is a way to drill down here and get this
    system into one of fairness on behalf of the Federal employees?
        Ms. Hayes. Well, again, with what Mr. McFarland said, you
    have over 200 different health insurers subcontracting under
    200 different PBM contracts. They all have different contracts.
    And, again, that creates chaos.
        Mr. Lynch. Yes.
        Ms. Hayes. And you may have one contract that has one
    different list for generic drugs and another contract with the
    same PBM that may have another list for generic drugs, and they
    are all on different pricing. I agree that if OPM got Federal
    pricing, it would give a level playing field. I think the other
    issue is transparency and disclosure. You have to understand
    pharmaceutical money that passes between drug companies to PBMs
    to plan sponsors. And that whole process needs to be 100
    percent transparent. That has to be 100 percent transparent.
        Mr. Lynch. I agree.
        Ms. Hayes. Money is being kept by the PBMs on your behalf,
    that should be going back and making those prices close to the
    Federal pricing. That is why you have a difference between a 12
    percent discount and a 50 to 60 percent discount with the VA.
    That difference is, in part, rebate money that is not being
    passed back.
        Mr. Lynch. OK. Mr. Sheehan, same question.
        Mr. Sheehan. I look at the system and I compare it with New
    York's system, and first, there is the breaking down into the
    200 separate plans. But the second piece is, between the PBMs
    and the Federal system, there is yet another set of players,
    and that is the health plans.
        And in the absence of OPM saying, this is what we expect,
    this is what we want, this is how we are going to pay, they
    have their own interests as an organization. So when we did our
    investigation of Medco, we found there were significant dollars
    changing hands from the drug companies to the health plans, and
    from the PBMs to the health plans, in ways that didn't show up
    in the reporting to OPM.
        So there is a financial interest in these plans, which is
    separate from running an experience-rated plan, where you just
    pass the cost through. And so, it seems to me, that they should
    take control of the process, whether it is going to be a
    Federal supply schedule process or contracting across the
    board, that is an issue for the Congress to decide and not for
    us, but I think by letting it just happen, you are missing out
    on the opportunities at two separate levels.
        Mr. Lynch. Well, there might have been a day when we could
    afford that; that day has long since passed, and we have to try
    to maximize our savings here. At this point, I will yield. Mr.
    Cummings, would you like 5 minutes?
        Mr. Cummings. I don't have any questions, thank you, Mr.
    Chairman.
        Mr. Lynch. OK. Ms. Holmes Norton for 5 minutes.
        Ms. Norton. No, thank you, Mr. Chairman.
        Mr. Lynch. OK. Well, I have a lot more questions in my own
    mind. The problem at the pharmacy benefit manager level is so
    complex with the markup on the drugs themselves, the handling
    of rebates, whether they keep them, whether they give them to
    the end user, the employees, it seems to be a very mixed bag.
    And, again, the level of complexity goes not only to the drug
    manufacturer, but also very much to the PBM, or Pharmacy
    Benefit Manager.
        Now, I haven't tried to really grapple with those entities
    on a one-to-one sort of basis, but what do you think about a
    PBM accountability act or some type of Pharmaceutical Benefit
    Manager Accountability Act, where you require transparency, you
    require those entities to operate in an open and understandable
    manner with their clients, and open themselves up to an
    auditing process so that we can understand what the heck is
    going on at that level?
        Mr. Sheehan. Chairman Lynch, if I could take a crack at
    that?
        Mr. Lynch. Sure.
        Mr. Sheehan. I have investigated, I think, all the major
    PBMs over the last 10 years, and to some degree, the problem is
    that PBMs are like Larry the Cable Guy. That you may get a
    great offer today, but by the time they get the box in your
    house and you have to sit and wait for them, switching is very
    difficult, and there aren't that many places to switch to. So
    the question is, how do you make sure that the PBMs do what you
    need them to do, after the contractual relationship exists.
        And it seems to me, that is a classic situation for
    regulation by Congress and by outside entities. You are not
    going to be able to negotiate anything in the contractual
    process, because your clout, once the contract starts and you
    have x-million patients or x-hundred thousand patients in the
    system, is very little.
        Mr. Lynch. You are saying, let us use the rebate situation.
    If we mandated that PBMs pass on the rebates to the end user,
    or 80 percent or 90 percent, when you say you have to tell them
    how to operate.
        Mr. Sheehan. It gets more complicated than that, and there
    are contracts like that. The difficulty was, about 10 years
    ago, the companies started to do that, and what happened was
    everything that used to be a rebate got called something else.
    It was a data fee.
        Mr. Lynch. Yes. Right.
        Mr. Sheehan. It was a thank you very much for visiting our
    facility fee. So part of it is making sure that in the
    contractual process there is a regulation that says, here is
    what the expectations are, and here is the minimum floor you
    have to meet. Otherwise, if you are a PBM, the trick is to,
    like Larry the Cable Guy, offer stuff on the front end. Then
    you are in the relationship. It is very hard to find out
    whether you got it, which is why the regulatory process is
    important.
        Mr. Lynch. OK. Ms. Hayes, did you have something to add on
    that?
        Ms. Hayes. I do. As Mr. Sheehan said, once you get into the
    relationship, the auditors come in, and auditors have been
    thwarted by the PBM industry in every effort possible, to make
    sure that the contractual obligation that the PBM has to its
    plan sponsor is actually being upheld.
        For example, when we go in and do rebate audits, that do
    not involve litigation, we have to go there and copy down every
    single line of every single contract, between the pharmacy
    benefit administrator, the PBM, and the drug manufacturer,
    because--I'm not sure why. Even though we are under very strict
    confidentiality rules, we have to copy down every single line
    of these very complex contracts. Some of the contracts are 5, 6
    inches deep.
        Mr. Lynch. Yes.
        Ms. Hayes. And so for us to copy down contracts that they
    have with drug manufacturers, not being able to take those to
    our offices and audit them in a normal manner that one would
    expect an auditor under confidentiality agreements to do, is
    very burdensome. And because of that, plan sponsors neither
    have the human resource ability or the financial ability to
    actually conduct these audits.
        So PBMs go into this contracting mode, and they will
    contract, like Larry the Cable Guy. I love that analogy. They
    will go in and contract what they think the clients will
    expect, knowing full well, that the plan sponsor will never
    have the ability to actually audit these agreements properly.
        Mr. Lynch. Yes. I agree. I have only had limited experience
    with a couple of the health benefit plans that I had worked
    with as an attorney, but it seems as though many of the
    contracts are structured in a way that, by virtue of their
    density and length, defends against the risk of being read by
    anyone.
        Ms. Hayes. Or understood.
        Mr. Lynch. Let alone an auditor. I think that the auditing
    piece here is problematic as well. In just reviewing what has
    gone on, there has also been a very, I think, concerted effort
    to either compromise the auditors or mystify them and bring in
    folks who really aren't equipped or able to conduct a valuable
    audit. And so they are often frustrated in their own efforts,
    and they end up giving a rather favorable review, probably with
    the hope of getting more auditing work.
        So it is almost as if we need to clean that system up as
    well, and have certain parameters to make sure we are getting
    lucid and thorough audits on these audits that we do request.
    And I know there has been a game played with the contractual
    language of mutually agreed upon auditor, which has frustrated
    many of these plans in getting an auditor in. Sometimes these
    delays can go on for a couple of years, where the parties can't
    agree on an auditor because the drug companies, or the PBMs,
    are taking advantage of that language. But I don't want to
    monopolize the time.
        Mr. Connolly, from northern Virginia, you are recognized
    for 5 minutes.
        Mr. Connolly. I thank the chairman and forgive me for
    coming late, I have been on the floor for a series of
    fascinating votes. Mr. Chairman, I would ask, without
    objection, that my opening statement be entered into the record
    at this point.
        Mr. Lynch. Without objection.
        [The prepared statement of Hon. Gerald E. Connolly
    follows:]

    [GRAPHIC] [TIFF OMITTED] T1394.040

        Mr. Connolly. I thank the Chair. And let me ask our
    panelists, do you agree with the OPM Inspector General's
    suggestion that the lack of transparency is a fundamental
    problem with PBMs acquisition of prescription drugs? And did
    you encounter similar problems with PBMs changing prescription
    drugs at pharmaceutical companies' behest or PBMs over-billing
    FEHBP carriers? Are those fair criticisms in your view?
        Mr. Sheehan. Let me take one of those that I think we have
    addressed, which is the issue of switching prescriptions. Both
    Medco and CareMark, through advanced PCS subsidiary, signed
    agreements in 2004 and again in 2005, agreeing to limit the
    switching activity that they would engage in. And I would defer
    to my colleagues at the OPM as to the compliance with that, but
    it has been pretty good. That is not universal throughout the
    industry. So that piece, has been at least addressed in the
    short term through litigation.
        The second piece though, which is the transparency on
    pricing, is still a huge problem and Ms. Hayes has talked about
    the audit side of that, but it is a problem just across the
    board, because it is very hard to figure out whether it is the
    retailer or the mail order pharmacy, or the PBM that is
    responsible for making sure the transparency occurs.
        Mr. Connolly. Ms. Hayes.
        Ms. Hayes. Well, I would agree that transparency is a huge
    issue.
        Mr. Connolly. Ms. Hayes, I can't hear you.
        Ms. Hayes. I am sorry. I would agree that transparency, or
    lack thereof, in this industry, is a huge issue as to why costs
    are increasing. We have talked about the fact that rebates from
    pharmaceutical manufactures, through the PBM, to the plan
    sponsor are not fully disclosed. And as a result, plan sponsors
    probably aren't getting as much as 50 percent of the rebates
    entitled to them, which would indeed, lower costs. So that is a
    large issue. I think the other large issue----
        Mr. Connolly. I am still having trouble hearing you, Ms.
    Hayes.
        Ms. Hayes. I am sorry.
        Mr. Connolly. And I know that is an important point that
    you are trying to make there. We are not realizing 50 percent
    of the savings because of why?
        Ms. Hayes. Because rebates between drug pharmaceutical
    companies, to the PBMs, to the plan sponsors, are not being
    passed back 100 percent I would agree that transparency is a
    large issue. I would also say that drug pricing and the
    complexity of drug pricing are large issues. As I said in my
    opening testimony, a single drug, a single brand drug, may have
    over 50 different prices depending on the manufacturer's
    strength and package size of that drug. Generics are even more
    mysterious, as far as pricing.
        The actual PBM itself, so in OPM's situation, you have 200
    different PBM relationships, are setting those prices. So the
    PBM has the ultimate control in plan assets by setting the
    generic pricing under these Maximum Allowable Costs. And those
    MAC lists, they consider proprietary. Not only are plan
    sponsors never given those lists, even auditors under non-
    disclosure and confidentiality agreements, have a hard time
    getting those to audit against those lists. Those lists change
    daily. The pricing changes daily. And so it is very hard to
    hold anybody accountable for drug pricing. A transparency and
    lack thereof, I think, is a big issue of why prescription drugs
    are increasing in costs.
        Mr. Connolly. Right. Mr. McFarland.
        Mr. McFarland. Well, I think the best way to describe it is
    to let me give you this scenario that I have in front of me.
    And it is very simplistic, but it goes to the heart of the
    problem of where is the money, and who has it.
        The drug manufacturer, the pharmaceutical company, sells a
    drug to a wholesaler for $1, just using that as an example.
    This sets the wholesale price at $1. The wholesaler sells the
    drug to a dispenser, either a PBM or a pharmacy, but in this
    case let us say it is the PBM for 70 cents, and charges back to
    the drug manufacturer the pharmaceutical company, 30 cents. So
    now they are made whole. The pricing in the PBM contract with
    the carrier is the wholesale price, minus the 15 percent
    discount. FEHBP pays 85 cents for the drug, but the PBM cost
    was only 70 cents, and apparently it is all legal, but it
    stinks.
        Mr. Connolly. I see my time is up, Mr. Chairman. I thank
    you.
        Mr. Lynch. Thank you. I have a couple of questions. If we
    were to, in fact, classify PBMs and/or pharmacies as
    subcontractors subject to the Federal acquisition regulations,
    I am trying to think that through. Would that, in your opinion,
    solve the transparency and cost issue in itself? Or would there
    be other downstream problems that I need to deal with? I am
    just trying to think this through.
        Mr. McFarland. It would be very beneficial if that were the
    case, that it could become a subcontractor. That would simply
    be that the Federal acquisition regulations would impose strict
    oversight by virtue of being there. But also the Truth in
    Negotiations Act, the law which protects the Federal Government
    and the taxpayer from unscrupulous contractors, that would be
    in play also. So that would be very helpful, and no law change
    would be needed. This would be something that OPM could do by
    changing the regulation.
        Mr. Lynch. Very good. Very good. All right.
        Mr. McFarland. Excuse me. Can I add something?
        Mr. Lynch. Sure. Absolutely.
        Mr. McFarland. What I forgot to mention was that would not
    necessarily guarantee a cost type contract. We would have to
    work with that aspect of it, but in the Federal acquisition
    regulations, it gives you that possibility of approaching that
    as a means of conducting your business. So that is what would
    be needed.
        Mr. Lynch. OK. That is very good. That is very helpful. I
    appreciate that. Let me ask, I guess I was assuming in my mind
    that in a simplistic way, that the people who actually are the
    end-users of these programs are the ones that are entitled to
    the rebates. That was an assumption I made, and I am not sure
    that is the case. Does the Federal Employees Health Benefits
    Plan have a right to the rebates?
        Mr. McFarland. Yes. They do have a right to the rebates, if
    it is written into the contract----
        Mr. Lynch. I see.
        Mr. McFarland [continuing]. Between the PBM and the health
    carrier.
        Mr. Lynch. OK.
        Mr. McFarland. But even in that situation, the great
    majority of rebates, we believe, are maintained by the PBM.
        Mr. Lynch. Please, Ms. Hayes?
        Ms. Hayes. If I can add to that, it is like the definition
    of what ``is'' is. It is the definition of what a rebate is,
    and PBMs have been very careful in saying, OK, you get 100
    percent of the rebates, but then there is other money that they
    receive from pharmaceutical manufacturers that aren't called
    rebates.
        Mr. Lynch. OK.
        Ms. Hayes. They are called cost effectiveness rebates. They
    are called formulary rebates. And I think the most egregious is
    data selling fees. PBMs sell data to pharmaceutical
    manufacturers and get lots of money back for selling data. That
    money is typically never passed back to the plan sponsors.
    Those aren't considered rebates. So, again, you need to have a
    broader definition of rebates. In contracts that we write, we
    call them financial benefits. All financial benefits that a PBM
    receives from drug manufacturers need to be passed back.
        Mr. Lynch. OK. I appreciate that.
        Mr. Sheehan. If I could?
        Mr. Lynch. Mr. Sheehan.
        Mr. Sheehan. The one other piece of this to focus on though
    are the two kinds of plans. There is the experienced-rated
    plans where the money does in theory comes back to the Federal
    Governments and the program if it is paid by the PBM. But in
    community-rated plans, my understanding is community-rated
    plans that the rebates don't come back. They are negotiated by
    the plan and that entity gets to keep the benefit of that
    population.
        Mr. Lynch. OK.
        Mr. Connolly, would you like to get 5 minutes?
        Mr. Connolly. I thank the Chair, and I would like to return
    to the previous dialog we were having. Is the PBM system more
    trouble than it is worth? Is the use of PBMs more trouble than
    it is worth?
        Ms. Hayes. Are you asking me?
        Mr. Connolly. I don't care. Anyone who wants to answer. Who
    feels like pulling that mic real close to them and answering my
    question?
        Ms. Hayes. OK. I feel that PBMs provide a very valuable
    service. And they do provide a very valuable service by going
    out and contracting with 55,000 pharmacies across the United
    States, by operating mail order pharmacies and providing plans
    a needed mechanism to process and pay prescription drug claims
    in a very efficient manner.
        But they have been allowed to run rampant. They have been
    allowed to take that very good initial idea that was formed
    back in the 1970's and 1980's, and they have been allowed to
    kind of run without control. And I think that is why you get at
    the issues of AWP prices going out of control. MAC prices being
    their own invention for generic drugs. Rebates not being passed
    back. Auditors routinely not being able to audit contracts. So
    initially, they were a great idea, and they have just been
    allowed to kind of run on their own.
        Mr. Connolly. And if I understood your previous answer, Ms.
    Hayes, from the previous round of questioning, they are
    actually withholding some of the savings from the prescription
    negotiations, the negotiated price of prescriptions for Federal
    employees. Is that correct?
        Ms. Hayes. That is correct.
        Mr. Connolly. And then second, they are not only doing
    that, they are cloaking themselves in secrecy with non-
    disclosure agreements?
        Ms. Hayes. That is correct.
        Mr. Connolly. Even requiring, if I understood you
    correctly, Government auditors not being able to sort of
    penetrate that shield of secrecy by making them also agree to
    such non-disclosure agreements. Is that correct?
        Ms. Hayes. I am not sure about Government auditors, but I
    know private auditors are routinely not allowed to audit these
    contracts.
        Mr. Connolly. And I would just say to the chairman, and I
    thank him so much for having this hearing, I think this is a
    very significant point. If one of the most important things
    this Congress has to do, in the context of Government health
    care reform, is to get our arms around the cost of health care.
    It is one of the fastest growing costs for the American
    consumer and family, for small business, for large businesses,
    for the Federal Government itself.
        Our deficits, our quality of life, our GDP, we are spending
    18 percent on health care today of GDP. If we do nothing, by
    2025 it is going to be 34 percent, unsustainable. And yet, we
    have mechanisms in place that, frankly, significantly impede
    our ability to get at those costs, if we can't penetrate that
    secrecy shield, and ensure that we have access to the savings
    we are effectuating, through the system that we created a
    number of years ago. So I really take your point. It was an
    efficient mechanism of delivering certain services, but it has
    gotten out of control. Mr. McFarland or Mr. Sheehan, would you
    care to comment on that?
        Mr. Sheehan. I think that this is an issue that Pat and I
    have worked on for the last 10 years, and we think you are
    exactly right. I would agree with Ms. Hayes that the system of
    processing pharmacy claims is a major advance, and the PBMs
    have done it very well for a number of years. And you think
    about going to a pharmacy and getting your prescription filled
    and billed within 3 seconds, that is a pretty amazing system.
        But the issue is, how much secrecy exists and what kind of
    disclosure takes place. It is when you got that box in your
    house and you are stuck with it, what can you find out about
    what you are being charged for, and why it is and how you could
    do it less expensively.
        Mr. Connolly. And before we hear from Mr. McFarland, if I
    could followup Mr. Sheehan, is that an area where you believe
    this Congress, legislatively, could perhaps help?
        Mr. Sheehan. Absolutely, because it is regulation of a
    relationship after the relationship exists.
        Mr. Connolly. Since we are looking at comprehensive health
    care reform, what the heck, maybe we could look at this too.
        Mr. Sheehan. And especially with OPM and a Government
    program.
        Mr. Connolly. Yes. Mr. McFarland.
        Mr. McFarland. The PBM concept, I think, is terrific. I
    think if done correctly and honestly, it would be a tremendous
    program. So it is not going to take a whole lot, other than
    making everybody honest. That is a big deal, of course. And we
    are certainly working toward that end.
        We are in the process in our office of doing a new study,
    we believe it is going to be new in the Federal sector. We
    think we will be able, by virtue of this analytical review, we
    will be able to come awfully close to understanding, maybe not
    the exact cost of the prescription, but we will be able to make
    comparisons with DOD, Veterans, Public Health Service, Coast
    Guard. We will be able to find out what the comparisons are
    there. So that will be a start for us.
        But I am in total concert with both what Ms. Hayes and Mr.
    Sheehan have said. And that is that it is very good, but we
    have some real groundwork to do.
        Mr. Connolly. It is hard for me, the Federal Government, to
    know whether I am saving money or not, if I don't have access
    to the information.
        Mr. McFarland. Well, that is exactly correct. And just
    going in and doing an average audit, by our auditors in our
    office, is a very difficult task. But it is almost
    insurmountable to go in and try and do an audit of a PBM,
    insurmountable. I think another example would be that a health
    carrier a while back was negotiating a multi-year contract with
    one of the PBMs. And part of the deal was that the PBM would
    get some additional money if the enrollment increased.
        Well, guess what? The time came, enrollment did not
    increase, so what did they do? The health carrier and the PBM
    sat down and renegotiated the contract, got the money, turned
    to OPM, and OPM paid it.
        Mr. Connolly. Mr. Chairman, I just want to end with this.
    To hear the Inspector General of the Office of Personnel
    Management say, to this committee, that it is almost
    insurmountable for his auditors, to be able to access this
    information in doing an audit of PBMs, is an astounding
    statement, and one I would hope this committee and this
    Congress would find, not a reflection of you, an unacceptable
    situation that needs to be addressed. I thank the Chair for his
    indulgence.
        Mr. Lynch. Thank you, Mr. Connolly. At this point we have
    covered the landscape, I think. However, beginning with Mr.
    Sheehan, I am just going to ask you, is there some area of this
    that we have not thoroughly mined? If we haven't really dug
    into this, I would like to give you at least 2 minutes; if you
    think we have covered it all, then that is fine, but if you
    think there is an area where you could amplify or just single
    out as being very important to this process.
        Mr. Sheehan. OK. Thank you, Mr. Chairman. The focus that I
    would leave you with, in addition to the very good points that
    have been raised so far, is to be conscious, not just of the
    price of drugs, but what the effects are of the drugs that are
    given to patients. And OPM really does not have the ability to
    do that now, because these contracts are so broken up into
    small pieces.
        So, it seems to me, one of the issues that OPM should be
    looking at is, what is the effect on patients of the drugs that
    we are buying, and how can we integrate that with other data
    that we have. So what we are doing is being a prudent purchaser
    across the board. And when you are talking about close to 30
    percent of your total spend on health care is used on drugs,
    that really becomes a critical area. Thank you, Mr. Chairman.
        Mr. Lynch. A great point. Thank you, Mr. Sheehan. Ms.
    Hayes.
        Ms. Hayes. Well, if I could summarize some of the things
    that we have talked about today. Certainly a single contract
    for OPM would benefit rather than this splintering of over 200
    different contracts. Simple terms. Simple terms that the lay
    person can understand, and that the auditor can audit, would be
    very beneficial. And not needless complexity. Disclosure of
    where the money is going. We have talked about rebates. We have
    talked about AWP pricing. The ability to have any auditor that
    is experienced being able to audit these contracts, I think is
    something that is needed.
        And I would also say that while it may benefit OPM to get
    Federal pricing in the Federal Employees program, I worry that
    may increase for private industry the cost of prescription
    drugs.
        Mr. Lynch. When you say Federal pricing are referring to
    the Federal supply schedule?
        Ms. Hayes. Yes. The Federal supply schedule.
        Mr. Lynch. OK.
        Ms. Hayes. The Federal schedule being applicable to OPM. I
    hope that does not increase for private industry the cost of
    prescription drugs. I hope that is not made up. And again, I
    feel that would be accomplished if AWP and MAC pricing could be
    published, so that plan sponsors do have an idea of what
    pricing is out there. So, again, that would be my
    recommendations.
        Mr. Lynch. Thank you. Mr. McFarland.
        Mr. McFarland. Well, just to wrap up, I think the important
    thing to concentrate on for us, other than getting to the
    bottom line price, is realizing sometimes that what we have to
    do from a criminal investigative prospective and audits,
    looking at some of the corporations that have gone astray, such
    as what has happened in the past with some of the PBMs. When
    there has to be a caution given to the corporation that they
    have to agree to ethical standards, and that they have to
    provide their employees with appropriate training, I think that
    leaves you with a very clear impression of how easy and how
    fast a company can go astray. And that is exactly what happened
    in a couple of the cases that Jim Sheehan and our office has
    worked together.
        It is just mind-boggling, the things that have taken place.
    When you consider that the PBMs would actually switch drugs,
    and not really care about the patient. Or when a patient sends
    in a prescription and that prescription goes in the waste can,
    or gets shredded, because they have a certain accountability
    for how many they are going to do that day or that week. That
    kind of stuff is unbelievable, but it is here. It is in front
    of us. We have to deal with it. It is just dispensing
    prescriptions without talking to the doctor and getting
    permission. And the cost to these people. So there is an awful
    lot to the overview and the over sight of this concern. And I
    know this isn't that unusual from maybe other corporations, but
    it is a big problem. Just the ethics alone.
        Mr. Connolly. Thank you, Mr. McFarland. I want to thank
    you, and just for the record, I know that we have several
    hearings going on right now, plus we have issues on the floor.
    I am going to allow any member of the committee to ask you
    questions in writing. And I would just ask you to respond to
    them, as well as inform the committee of your answers.
        But with that, I want to thank you for coming before the
    committee today. I want to thank you for your willingness to
    help us work on this problem. It is an ongoing process, so we
    hope that you will continue to work with our offices as we try
    to devise some legislative and regulatory solutions to the
    problems that we have described here today. Thank you very
    much. Have a good day.
        Mr. Sheehan. Thank you, Mr. Chairman.
        Ms. Hayes. Thank you.
        Mr. Lynch. Welcome. It is the custom of this committee to
    swear all witnesses who are to provide testimony. May I please
    ask you to rise and raise your right hands?
        [Witnesses sworn.]
        Mr. Lynch. Let the record indicate that all of the
    witnesses have answered in the affirmative. I will offer brief
    introductions of our next panel and we will have 5 minutes of
    testimony from each of the witnesses.
        Ms. Nancy Kichak is the Associate Director for the Human
    Resources Policy Division for the Office of Personnel
    Management. In this position, Ms. Kichak leads the design,
    development and implementation of innovative flexible merit
    based human resource policies. Previously, Ms. Kichak served as
    the Director of the Office of Actuaries at the Office of
    Personnel Management.
        Rear Admiral Thomas McGinnis, currently serves as chief
    pharmaceutical operations directorate, responsible for pharmacy
    operations of the TRICARE Management Activity. He is a member
    of the Board of Advisory Associates of Rutgers College of
    Pharmacy. Navy Mutual Aide Association, nonresident director,
    and the American Society on Health Systems Pharmacists.
        Mr. John Dicken is a Director for Health Care Issues at the
    U.S. Government Accountability Office, where he directs GAO's
    evaluations of private health insurance, long term care
    quality, and financing and prescription drug pricing issues. He
    previously held Analyst and Assistant Director positions with
    GAO's Health Care Team. Welcome to you all. Ms. Kichak, you now
    have 5 minutes for an opening statement.

    STATEMENTS OF NANCY H. KICHAK, ASSOCIATE DIRECTOR FOR STRATEGIC
       HUMAN RESOURCES POLICY DIVISION, U.S. OFFICE OF PERSONNEL
          MANAGEMENT; REAR ADMIRAL THOMAS J. McGINNIS, CHIEF,
       PHARMACEUTICAL OPERATIONS DIRECTORATE, TRICARE MANAGEMENT
    ACTIVITY, OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE, HEALTH
    AFFAIRS; AND JOHN E. DICKEN, DIRECTOR, HEALTH CARE, GOVERNMENT
                         ACCOUNTABILITY OFFICE

                      STATEMENT OF NANCY H. KICHAK

        Ms. Kichak. Thank you, Chairman Lynch. Thank you for
    holding the hearing to discuss the oversight of prescription
    drug benefits within the Federal Employees Health Benefits
    Program. The FEHB law provides OPM with authority to contract
    with private sector health plans that cover specified areas of
    health care, including prescription drugs. We currently
    contract with 111 health plans, which provide 269 plan options
    nationwide, from which retirees and employees may select the
    option that best meets their needs. The program is a $35
    billion program and drugs present about 29 percent of claims.
        Like many private sector employers, the FEHB plans use
    pharmacy benefit management arrangements. To improve the
    administration of the drug benefits, OPM issued regulations in
    August 2003, that allowed the OPM Office of Inspector General
    to have full access to experience-rated carriers' agreements
    with their pharmacy benefit managers. In 2005, OPM issued new
    contract requirements that included standards for FEHB carriers
    to use in contracts with vendors for retail and mail order
    pharmacy.
        The carriers required to use these standards, which provide
    for PBM transparency, integrity and performance. Each year we
    negotiate with individual carriers to design a prescription
    drug package that provides access to FDA approved drugs placed
    in tiers, based on clinical effectiveness and cost. Carriers
    also use preauthorization to determine medical necessity for
    certain drugs, and drug utilization reviews to check for
    excessive use, duplication and frequency. Many carriers promote
    generic drug awareness and dispense generic equivalents, if
    available.
        Next I would like to address the specific questions raised
    in your invitation to this hearing. You inquired about lack of
    transparency in the pricing of prescription drugs. First and
    foremost to OPM is providing information so that enrollees
    understand the benefits they are purchasing and the options
    they have. Therefore, many carriers provide drug transparency
    tools on their secure member Web sites. Through our
    regulations, our Office of the Inspection General has full
    access to the agreements our carriers have with PBMs. Whether
    increasing transparency alone will lead to lower pharmacy costs
    is unclear. In June 2008, the Congressional Budget Office found
    that more transparency did not necessarily lead to lower health
    care spending.
        You asked how prescription drug benefits provided in other
    Government agencies, such as Defense, VA and HHS. Each of these
    Federal agencies operates under its own statutory framework.
    TRICARE and VA directly deliver health care as a significant
    part of their service to their constituencies, and have access
    to drug prices based on statutory authorities.
        You asked how prescription drug benefits are priced and
    delivered in the private sector. Private sector employers
    operate in competitive environments, and many directly contract
    with PBMs to manage their drug programs and to process and pay
    prescription drug claims. PBMs also develop drug formularies,
    contract with pharmacies and negotiate discounts and rebates
    with drug manufacturers. FEHB carriers rely on PBMs to manage
    drug cost and utilization for their enrolled population. OPM,
    in turn, negotiates with carriers on benefit design and program
    administration to encourage the efficient use of prescription
    drugs.
        You asked if OPM should consider alternative pricing and
    contracting methods for the FEHB Program's drug benefits. The
    cost of drugs is of great concern to OPM, as it is to private
    companies and other Government purchasers. OPM is committed to
    studying all options that may improve the delivery of these
    benefits. We want the best and most affordable product and are
    looking for procedures that could be of assistance.
        We are exploring a broad range of options, from improving
    our current contractual procedures, to completely redesigning
    how drug services can be delivered if our legislative framework
    is modified. I appreciate the opportunity to testify today, and
    I would be happy to answer any questions.
        [The prepared statement of Ms. Kichak follows:]

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        Mr. Lynch. Thank you, Ms. Kichak.
        Rear Admiral McGinnis, you are recognized for 5 minutes.

              STATEMENT OF REAR ADMIRAL THOMAS J. McGINNIS

        Admiral McGinnis. Mr. Chairman and distinguished members of
    the committee, thank you for the opportunity to discuss the
    evolution of the Department of Defense TRICARE Pharmacy
    Program.
        Over the last 10 years, DOD has learned many lessons in the
    area of pharmacy benefit management. Prior to 2004, DOD's
    purchase care pharmacy benefit, that is the retail and mail
    order portion benefit, was carved into the five regional
    TRICARE Managed Care Support Contracts, which provided the
    TRICARE medical benefit. DOD determined that this type of
    carving, decentralized pharmacy benefit management structure,
    created significant challenges to the department. And it was
    clear that DOD needed to make some major changes for a number
    of reasons.
        First a fragmented market share gave DOD less leverage with
    pharmaceutical manufacturers to negotiate favorable pricing, in
    exchange for formulary placement. Second the pharmacy benefit
    lacked portability across the regions, and the lack of
    standardization led to a non-uniformity of the benefit. And
    most importantly, actual expenditures and rebates received by
    its contractors for pharmaceuticals, were not transparent to
    TRICARE. This structure also led to duplicative administrative
    services and fees, along with the inability to effectively plan
    and develop cost-saving measures.
        Moreover, Federal discounts in the retail pharmacy venue
    were inaccessible because management of the benefit was not
    under direct DOD control. DOD, like many large U.S. employers,
    took action to carve out the pharmacy benefit from the managed
    care contracts and placed it under DOD management using a
    single PBM.
        DOD now had the leverage it needed for very favorable
    pricing with the pharmaceutical industry for formulary
    management. DOD has implemented formulary decisions in 38 drug
    classes since 2005, representing over 50 percent of the fiscal
    year 2008 total DOD drug expenditures. Mr. Dicken, of the GAO,
    reported last year in April 2008, that DOD avoided over $447
    million in drug costs in fiscal year 2006 due to the formulary
    process. And $916 million in fiscal year 2007. TRICARE also
    received an additional $60 million in rebates from the
    pharmaceutical industry in fiscal year 2007, making the savings
    to the U.S. taxpayer nearly $1 billion.
        The fiscal year 2007 drug costs of $6.5 billion, accounted
    for 18 percent of DOD's total health care costs. Legislation
    passed in 2008 authorized DOD access to Federal discounts for
    all covered drugs dispensed in its retail pharmacy network,
    bringing prices in the retail network more in line with what
    DOD pays for pharmaceuticals dispensed in its military
    treatment facilities and in the TRICARE Mail Order Pharmacy
    Program, which are some of the lowest prices available in the
    country.
        Today TRICARE has virtually every community pharmacy in the
    country as a member of its retail network, and experiences
    outstanding customer service based on a DOD quarterly survey of
    its beneficiaries.
        I want to thank the committee for giving me the opportunity
    to speak today about the TRICARE Pharmacy Program, and how we
    continue to provide a world-class pharmacy benefit to active
    duty uniform service members, retirees and dependents around
    the world.
        [The prepared statement of Admiral McGinnis follows:]

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        [GRAPHIC] [TIFF OMITTED] T1394.052

        [GRAPHIC] [TIFF OMITTED] T1394.053

        Mr. Lynch. Thank you, Admiral. Mr. Dicken, you are now
    recognized for 5 minutes.

                      STATEMENT OF JOHN E. DICKEN

        Mr. Dicken. Great. Thank you, Mr. Chairman and members of
    the subcommittee. I am pleased to be here today as you examine
    approaches to control rising drug spending within the Federal
    Employees Health Benefits Program [FEHBP].
        Prescription drug spending has been one of the fastest
    growing segments of health care spending in both the public and
    private sectors. Notably, prescription drug spending has been a
    significant contributor to FEHBP costs and premium growth.
    Projected increases in the cost of prescription drugs alone,
    would account for about a 3 to 5 percent annual increase in
    FEHBP premiums from 2002 to 2007.
        The Office of Personnel Management predicts that
    prescription drugs will continue to be a primary driver of
    program costs. Other Federal programs also continue to face
    unsustainable increases in prescription drug spending, and use
    varying approaches in an effort to control the spending.
        My remarks today, based on prior GAO work, and updates from
    other congressional and Federal sources, will describe the
    approach used by FEHBP to control prescription drug spending. I
    will also broadly summarize approaches used under Medicare, the
    Department of Veterans Affairs, the Department of Defense and
    Medicaid.
        As you have already heard today from other expert
    witnesses, representing several of these Federal programs, my
    comments will step back to describe at a higher level, the
    general approaches these programs use in controlling drug
    spending. In short, the primary difference among these
    programs, is that FEHBP and Medicare Part D, rely on
    competition between health plans to control prescription drug
    spending, while VA, DOD and Medicaid use other methods, such as
    statutorily mandated prices for drug negotiations with drug
    suppliers.
        For FEHBP, competition aims to give plans an incentive to
    reign in prescription drug costs, and to leverage their market
    share to obtain favorable prices. Like most private employer-
    sponsored health plans, most FEHBP plans contract with PBMs to
    help administer the prescription drug benefit.
        We have outlined key approaches that PBMs use in an effort
    to achieve savings for the health plans. These include: One,
    negotiating rebates with drug manufacturers and passing some of
    the savings to the plans; two, obtaining discounts from retail
    pharmacies, and dispensing drugs at lower costs through their
    own mail order pharmacies; three, using such techniques as
    prior authorization and generic substitution to reduce
    utilization of certain drugs, or substitute other less costly
    drugs; and four, developing and managing formularies to
    encourage enrollees to use preferred drugs and to influence
    price negotiations with manufacturers.
        While OPM itself does not negotiate drug prices or
    discounts for FEHBP, it attempts to limit spending through
    annual premium and benefit negotiations with plans, including
    the encouragement of spending controls, such as benefit designs
    that provide incentives for increased use of generic drugs.
        Medicare Part D uses a model similar to the FEHBP, by
    relying on competing health plans and their PBMs to control
    drug spending. In part, plan sponsors compete on their ability
    to negotiate prices and price concessions with drug
    manufacturers and with pharmacies. Even though the Centers for
    Medicare and Medicaid Services is not involved in negotiations,
    plans are required to report price concessions to CMS, to help
    determine the extent to which they are passed on to
    beneficiaries.
        In contrast, VA and DOD use statutorily mandated discounts
    as well as direct negotiations with drug suppliers, to limit
    drug spending. They have access to a number of prices to
    consider when purchasing drugs, paying the lowest. These
    include the Federal supply schedule prices that VA negotiates
    with drug manufacturers. These prices are intended to be no
    more than those manufacturers charge their most-favored, non-
    Federal customers under comparable terms and conditions.
        Finally, Medicaid is subject to aggregate payment limits
    and drug payment guidelines set by CMS. Medicaid does not
    negotiate drug prices with manufacturers, but reimburses retail
    pharmacies for drugs dispensed to beneficiaries at set prices.
    An important element of controlling Medicaid drug spending is
    the Medicaid drug rebate program, under which drug
    manufacturers are required by law, to provide rebates for
    certain drugs covered by Medicaid. Under the rebate program,
    States take advantage of prices manufacturers receive for drugs
    in the commercial market, that reflect discounts and rebates
    negotiated by private payers.
        In addition, Medicaid, like each of the other programs I
    discussed, uses techniques such as prior authorization, generic
    substitution, utilization review, and cost sharing requirements
    to limit drug spending. Mr. Chairman, this concludes my
    statement. I will be happy to answer any questions that you, or
    other members of the subcommittee, may have.
        [The prepared statement of Mr. Dicken follows:]

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        Mr. Lynch. Thank you, Mr. Dicken.
        I now recognize myself for 5 minutes. Ms. Kichak, in your
    testimony, admittedly you said that transparency doesn't always
    result in lower prices; however, for the oversight committee,
    for us, it is not an option. Oversight cannot go forward
    without transparency, so we don't have a choice of not having
    transparency, even if we didn't think the value of transparency
    was something that we put a high value on, let us say. It has
    just got to happen. We have to have it statutorily----
        Ms. Kichak. Right.
        Mr. Lynch [continuing]. And through our congressional
    mandate, it is to have transparency.
        Ms. Kichak. Well, we support transparency, which is why
    with every suggestion or every time our Inspector General makes
    suggestions to us, we consider them very carefully. And we have
    done two significant things, which I had in my opening
    statement, that we got from work when the Inspector General
    came back to us and raised problems.
        One was what we call the large provider contract
    regulations, which gives the Inspector General full access to
    the full PBM contract. I understand that it is now not digging
    down as far as they would like to go. What was described in the
    previous panel, is an industry problem, where the PBMs are not
    making their costs and their operations public to anyone. It is
    not just an FEHB problem, but within the FEHB, we have given
    full access to the contracts that are available to our
    Inspector General.
        Mr. Lynch. Understood.
        Ms. Kichak. Yes.
        Mr. Lynch. Understood, but the pharmacy benefit managers
    have made this system so opaque and so complex, that even when
    I sit an auditor right on there, have them go, these are
    professionals now----
        Ms. Kichak. Right.
        Mr. Lynch [continuing]. They can't figure out what things
    cost and whether I am getting a good deal or not.
        Ms. Kichak. And we would agree with you.
        Mr. Lynch. Right. OK. So that is a problem. That is a huge
    problem. We can't operate that way anymore. The administration
    is looking for savings, and we are trying to help the
    administration, and we think this is an area that is very
    fertile ground for savings.
        When we compare what TRICARE is paying, what others are
    paying, and we look at the discount TRICARE, up around 50
    percent, VA up around 60, somewhere in that range, and then we
    look at OPM getting about 12 percent with the FEHBP, Federal
    Employees Health Benefits Plan, that simply is not acceptable.
        Now we need to dramatically change this. Part of one
    solution would be to classify PBMs as subcontractors, subject
    to the Federal acquisition regulations. Now that is not a
    simple system either, as someone who has spent far too many
    trips to Iraq and Afghanistan trying to figure out how we
    manage those contracts.
        Those are not simple either, but they are a walk in the
    park compared to trying to figure the system that we have now
    with the Federal Employees Health Benefits Plan. It is actually
    structured and operated in a way that is meant to block
    oversight and block auditing. We cannot have that any more.
    There are even procedural limitations on the auditors; they are
    not allowed to copy information, that whole system is built
    on--there is no competitive model, in your competitive model.
        The system that is set up at the Federal Employees Health
    Benefits Plan is basically increase complexity, to the degree
    that it is not understandable, hide information from the
    consumer and from the auditors, and from the U.S. Congress
    Committee on Oversight. Basically deny information that would
    allow people to make that competitive decision on pricing, and
    basically charge as much as you possibly can in that atmosphere
    and in that framework of concealing information and making it
    so complex. That is the system we have right now. And we can't
    continue to operate that way.
        So what we think is one way to clarify is to classify these
    folks as contractors. At least we put them in a system where we
    can keep score and we can figure out whether they are giving us
    a raw deal or not. And as I understand it, we can do that by
    Executive order, we can do that by regulation right now at OPM.
    Is that something that you are open to?
        Ms. Kichak. We believe that there is definitely more
    information that should be available, but we do not believe
    that we have the regulatory authority to do that. We think that
    what we have done through regulation--you see, OPM contracts
    with the health plans. The health plans contract with the PBMs.
    We are not direct contractors for the drug services, so we
    don't have the same authority we would if we were a direct
    contractor.
        In order to become a direct contractor with a PBM, it would
    require a statute change, in our opinion, not a regulation
    change. We believe, but we will continue to explore it, because
    we explore everything our Inspector General suggests to us, but
    we believe the regulation we changed giving the Inspector
    General full access to PBM contracts, was the extent of the
    authority that we could do through regulation.
        So this is a question of law that needs further
    exploration, because we certainly believe in transparency and
    we would like to further that to the extent that we can.
        Mr. Lynch. Well, I have to say that in trying to figure
    this whole system out, there is nothing more complex than what
    you have over there at the Federal Employees Health Benefits
    Program. This is really very convoluted, and I am an attorney.
    I have done contract law.
        But you have a system over there that is meant to deceive,
    and to keep the truth and information from getting to the
    public and to the beneficiaries. We don't even know what stuff
    costs, and so you may say you are for transparency, but take a
    good hard look at that system, and that doesn't even have the
    beginnings of any transparency and we are supposed to be trying
    to save money here.
        And I am very disappointed to hear you say that, because we
    think you do have the regulatory power. I will file legislation
    to have these folks classified as subcontractors. I am going to
    do that. I think you are making me work harder than I need to.
    I think you have that power already, but maybe my filing this
    legislation will light a fire under somebody.
        Ms. Kichak. Well, we would be glad to get back to you with
    an explanation of what we think our authority is. Because if we
    have that authority, then we will not make you work harder than
    you have to. We will see what we can do to exercise that.
        Mr. Lynch. God bless you.
        Ms. Kichak. OK.
        Mr. Lynch. Thank you. All right. Now, look, you are new
    over there, you have to be new.
        Ms. Kichak. Thank you.
        Mr. Lynch. No, but this is probably a question beyond your
    own experience, but do you have any idea why we might have 256
    contractors that we deal with?
        Ms. Kichak. Because we have HMOs in most of the States in
    the Nation. We only have about 13 Government-wide plans that
    service everybody. And even out of those 13, a certain segment
    of them, a very important segment of them, are to just limited
    groups of people like foreign service officers, or rural letter
    carriers. But we have HMOs in California, in Florida, New York,
    etc.
        Mr. Lynch. I see.
        Ms. Kichak. And they deliver care locally.
        Mr. Lynch. And there are only a handful of the larger ones
    that are national? Most of these are regional or local?
        Ms. Kichak. Most of them are regional.
        Mr. Lynch. OK.
        Ms. Kichak. Most of the big numbers come from the regional
    plans.
        Mr. Lynch. OK.
        Ms. Kichak. And again, the national plan is open to
    everybody. I think it might be about seven and then another
    five are to special groups.
        Mr. Lynch. OK. Now you have 7.7 million, that I gather,
    that are within your group there?
        Ms. Kichak. Right.
        Mr. Lynch. Let me turn to Rear Admiral McGinnis now. I
    think you have 9 million, but you have 7 million that are
    actually participants in your pharmacy plan, and those folks
    are spread out all over as well, aren't they?
        Admiral McGinnis. That is correct, sir. They are all over
    the world. We have about 9.5 million beneficiaries today, and
    about 7 million use the pharmacy benefit.
        Mr. Lynch. Now in your testimony, you also described that
    you have a limited number of contractors. Is that correct, or
    did I mis-hear you?
        Admiral McGinnis. No. You are correct. We have one
    contractor currently, that provides the retail pharmacy benefit
    for us. One contractor that provides the mail order pharmacy
    benefit for us. It happens to be the same contractor,
    ExpressScripts. We saw duplications yet in that, and beginning
    November 4th, there will only be one contractor providing both
    the retail and pharmacy benefit.
        Mr. Lynch. How did you do the competition for that one
    contract?
        Admiral McGinnis. We used the Federal Acquisition
    Regulations, sir. We put out our requirements, requests for
    proposals. They are submitted, we review them internally, and
    award that contract on many different aspects. Past
    performance, we go out to commercial clients who use this PBM
    and ask them, how are they doing for you?
        Mr. Lynch. Right.
        Admiral McGinnis. And we take that into consideration when
    we award this contract. It is a 1-year contract with four
    option years.
        Mr. Lynch. It is interesting. You have a situation where
    you are using one contractor. You are I think, perhaps putting
    all your chips on one bet, but you are getting a 50 percent
    discount or something of that magnitude. And when we dice it
    up, we are getting a 12 percent discount. I am just wondering
    if there is a proximate cause there, a direct relationship on
    that point.
        Mr. Dicken, you addressed that a little bit in your opening
    statement, about the fact that there are two models here. Maybe
    it is apples and oranges I am comparing here, but what do you
    think?
        Mr. Dicken. Well, I think certainly the differences there
    are in part because some of the prices that TRICARE are able to
    get, are statutorily set. That they are able to choose the
    lowest of prices. They are defined by statute, that set ceiling
    prices.
        Those ceiling prices in exchange are based on some of the
    best prices that are able to be negotiated by non-Federal
    payers. And so there is a certain guarantee of a level of
    prices that then TRICARE can negotiate below if they are able
    to. On the other hand, FEHBP, in its contracts with the
    multiple plans, those are individual contractual relationships
    where the plans and their PBMs will negotiate on behalf of each
    plan. And there is no guarantee in the way that there would be
    for TRICARE of a ceiling price.
        Mr. Lynch. OK. I understand, Ms. Kichak, that OPM attempted
    to control drug spending in 2000 by introducing a pilot plan
    with SAMBA?
        Ms. Kichak. Correct.
        Mr. Lynch. Do you recall that?
        Ms. Kichak. Yes, I do.
        Mr. Lynch. Now I have been reading up on this so I might be
    wrong on this, but as I understand it, SAMBA is the Special
    Agents Mutual Benefit Association.
        Ms. Kichak. Correct. Mostly FBI agents and Secret Services
    agents.
        Mr. Lynch. Just a few thousand people at the time?
        Ms. Kichak. Yes.
        Mr. Lynch. OK. And my understanding is that you tried to do
    a pilot program that would allow the special agents and their
    families, just a few thousand beneficiaries, to purchase their
    drugs off of the Federal supply schedule.
        Ms. Kichak. That is correct.
        Mr. Lynch. OK. And if again, I am correct, at the threat of
    that pilot program, we had three drug companies, big ones,
    refuse to participate and supply drugs to that program.
        Ms. Kichak. I can't attest to the exact number, but that is
    what happened. It was a concern of the drug industry. We were
    trying to try a new approach and get better discounts. It was a
    concern of the drug industry, that if that was the nose under
    the tent, and we were going to move 8 million people, onto
    those Federal supply schedules, with those major discounts, the
    pharmaceutical companies would not be able to sustain the
    discounts they had promised to a big group, but more limited
    than ours. And they opposed it, and said that they would not
    honor their contract on the Federal supply schedule if we went
    forward. And we were forced to withdraw that proposal.
        Mr. Lynch. Wow. The formulary that would have been
    available to the special agents, was that a full formulary of
    proprietary drugs as well as generics?
        Ms. Kichak. That was the full spectrum of drugs on the
    supply schedule. Yes.
        Mr. Lynch. I am just wondering why we didn't call their
    bluff, in terms of their refusal to supply those drugs. It
    seems like sort of a brash and confrontational way to deal with
    the problem.
        Ms. Kichak. It was definitely a very stressful situation,
    because, of course, our responsibility is to make sure, and we
    take this very seriously, that Federal employees have access to
    health care. And every year they have the option to select new.
    But we wanted to have that plan in place and coverage
    continuing, and the manager of the Federal supply schedule at
    that time, VA, was very concerned that this pilot was
    jeopardizing care to other members of the VA, or other Federal
    purchasers from that schedule, and really asked us to withdraw
    the pilot.
        I think that we pushed it very, very hard. It delayed our
    getting ready for open season and negotiating rates and
    benefits, because we had to get somebody else. We had open
    season on time, but we, at some point, had a point at which we
    had to enter into a contract with SAMBA to go forward with
    these coverages or they would not have been in the program in
    the following year. And so we chose to withdraw the pilot.
        Mr. Lynch. OK. Now, and I understand you don't remember how
    many companies were involved?
        Ms. Kichak. I really don't.
        Mr. Lynch. From my readings, it was three larger
    pharmaceutical companies. Now I am just wondering if you
    remember what percentage of the drugs on the formulary would
    have been affected by these three companies, or four companies,
    however, in terms of the program going forward?
        Ms. Kichak. Ninety percent.
        Mr. Lynch. Ninety percent?
        Ms. Kichak. So they were three large companies.
        Mr. Lynch. OK. Yes.
        Ms. Kichak. That I have confirmed.
        Mr. Lynch. I am just trying to replay that in my mind. I
    know it was Pfizer, Parke-Davis and Merck. That is the
    information that I have. I am just wondering if a similar pilot
    program would work if we just used generics. That way, if
    something is generic, it is out there, it is not subject to
    patent control, and if you have real competition, and you get a
    lot of people that could produce that drug at a reasonable
    cost, do you think a pilot program just focusing on generics,
    where three big players can't come in and say embargo this
    whole deal.
        Ms. Kichak. Well, let me say, as we have said before, this
    is a very complex program, and drugs are very complex, retail,
    mail order, generic, etc.
        Mr. Lynch. Tell me about it.
        Ms. Kichak. And so I am uncomfortable, but I am going to
    take a stab at it anyway.
        Mr. Lynch. OK.
        Ms. Kichak. Where you really need to save your money in
    drugs is on the non-generic. The generic are really, in my
    opinion and in my experience, are pretty low priced anyway.
        Mr. Lynch. All right.
        Ms. Kichak. And to make it worthwhile, I think you would
    have to go for the brands.
        Mr. Lynch. That is a great point. That is a great point.
    Thank you. Admiral McGinnis, the success that you have had over
    there, at TRICARE, has there been any attempt to expand beyond
    your existing population?
        Admiral McGinnis. No. We have only covered members of the
    seven uniform services, so we have not been asked to look any
    further than that. We have expanded the benefit to virtually
    every pharmacy in the country today.
        Mr. Lynch. OK. In the testimony earlier today, Ms. Kichak,
    we heard from Mr. McFarland that the transparency and the data
    for them to make determination, was not available, and yet you
    say there has been a new effort to do just that, to free that
    up. There seems to be a little bit of difference in your views
    and Mr. McFarland's views, the Inspector General, in terms of
    the access to the information, the transparency of the
    organizations themselves. Do you know what might cause that
    difference of opinion?
        Ms. Kichak. I think what is happening here is, at one point
    when one of our plans subcontracted with a PBM, the subcontract
    was not available for audit. So now that actual subcontract is
    available, there is definitely improvement. What I believe that
    our Office of Inspector General would like and find very
    helpful, and what all of the previous panels asked for, was
    more basic. How much profit, where is the money going, the
    whole under workings within the drug companies.
        That doesn't become a part of the contract, or the
    subcontract, and that is not yet available. And as I was saying
    before, I am not sure, and I promise to get you an answer, that
    we have the authority, through our regulatory process, to
    demand that kind of information. But I will find out. At one
    point, the contract wasn't even available. Now the contract is
    fully available, but the underlying workings still have not
    been opened up. In the same manner, that all the previous
    witnesses said, the drug companies do not make this information
    available.
        Mr. Lynch. OK. Let me jump back. My idea originally was to
    look at the generics, because I saw that problem you had with
    the SAMBA Program. Is there any appetite--I know the earlier
    incident was in 2000, is there any appetite at OPM to look at
    another pilot program where we might expand the access to the
    Federal supply schedule for others?
        Ms. Kichak. Well, as you know, at OPM we have a new
    director, who is taking a top-down look at everything. We have
    a new focus on data driven analysis, which is also looking at
    that stuff, and we are looking at every health plan with a
    fresh look. Now the new administration, by the time they got
    here, we were already engaged in negotiations for 2010, because
    the process starts early. But that is certainly something--we
    have an appetite right now for looking at everything. We are
    bottom-up delving into whether these schedules are the right
    way to go, whether we should carve out drugs. Everything is on
    the table, how much data we can get from our carriers is also
    on the table. So we are taking a fresh look, and I would say,
    therefore, we are definitely going to consider that along with
    many other options.
        Mr. Lynch. OK. You know one of the other things, when I
    read through that case of the SAMBA plan, it puzzled me. Now
    under the statutory and regulatory guidance, these carriers
    should not be receiving any financial benefit from the carved
    out pharmacy plans. That is the way it is supposed to work. Now
    why do you think we have such opposition from the carriers when
    we try to introduce--if there is no financial benefit, why all
    the opposition?
        Ms. Kichak. Well, change is difficult for everybody, first
    of all. Second, administratively, particularly in this day and
    age where we are trying to do so many health care programs,
    wellness programs, that is the wrong word, but case management
    programs. For example, diabetes, where you are trying to track
    prescription drugs, the usage of the right drugs, what are
    health care outcomes, and we are pushing our plans to do things
    like that, I think that is an incentive, or one of the reasons
    why the plans want to be able to have access to that data. I
    think the other thing they are trying to do is, in the
    competitive environment, they think they can come up with the
    best design. And we do have different designs.
        We have people today that are waiving the copays on generic
    drugs to try to get people to switch. We have other people,
    other plans that get you in generic drugs by a plan manager who
    looks at that. We have plans that are trying to be more cost-
    effective through e-prescribing and getting you to generic that
    way. Or trying to get you to the most effective drug that way.
    So I think the plans are trying to use the drugs as part of
    their health care initiatives, and that is one of the reasons
    for the resistance.
        Mr. Lynch. Fair enough.
        Mr. Dicken, I have not bothered you that much. Let me shift
    to you. Has GAO encountered any difficulty, in other instances,
    obtaining access to data as we had described with Ms. Kichak in
    trying to fulfill its role in assuring that the Federal
    Government does not overpay for prescription drugs?
        Mr. Dicken. Yes. I would be glad to describe GAO's
    experience. I think the panelists in the first panel, well-
    described the challenges that oversight agencies have in
    transparency in this area. GAO in 2003, did examine the
    experience of three FEHBP plans with their PMBs, and we were
    able to look at particular contracts, or financial reports that
    were specific to those FEHBP plans and their PBMs.
        I would like to make a distinction though, that while we
    were able to look at that, I think that was much of the issue
    that Ms. Kichak was talking about for what is being made
    available to the Inspectors General. There is a much larger
    book of business that the PBMs have where FEHBP is a
    significant part, but not the entire part. And that affects
    their contracts more broadly with manufacturers and with
    pharmacies. And so while we were able to look at the
    information specific to FEHBP, we did not obtain information
    for that broader book of business that could affect things like
    the prices they are requiring for mail order drugs, or the
    total rebates that they are getting on their entire book of
    business, not just those allocated to FEHBP.
        Mr. Lynch. Let me drill down a little bit on that. You had
    a chance to review the pharmacy benefit managers. In your
    analysis, or attempted analysis, what information was there
    that you did not have access to that you think might have been
    helpful in judging their effectiveness?
        Mr. Dicken. I think the distinction really is, we were able
    to look at what was specific to the FEHBP book of business, but
    not information that was broader across their entire book of
    business that would then affect rebates they may be getting
    that would include, for example, their FEHBP lives, as well as
    all of their commercial lives that PBM would be negotiating
    with manufacturers on their behalf.
        Mr. Lynch. So that was considered proprietary, the
    relationships they had with, in other words, these rebates that
    are--call them what you may, these other financial incentives
    that they were getting, those arrangements were not subject to
    your review.
        Mr. Dicken. If they were not rebates specifically dedicated
    to FEHBPs, so we were able to look at what rebates the PBMs
    promised to pass on to the FEHBP plans, but that they may also
    be getting rebates that are much broader for their entire book
    of business. And that is the part that we did not obtain.
        Mr. Lynch. OK. But FEHBP, you have 7.7 million people?
        Mr. Dicken. Yes.
        Mr. Lynch. Well, I guess you can't assume that any percent
    of the volume of their business is dedicated. But it would be
    nice to get that information to find out their full menu of
    revenue sources, and find out whether or not the employees, the
    members of the FEHBP are getting the benefit of some of those
    rebates.
        As I did earlier with the previous panel, I am going to ask
    you, you know obviously I didn't exhaust the entire landscape
    of issues that we could have addressed. But, and again, I am
    going to allow other Members who are not in attendance to ask
    you questions in writing, and I would appreciate your
    cooperation in answering those if they do come. Why don't we
    start with Mr. Dicken, since we have been down at Ms. Kichak's
    end, for most of the hearing? Take 2 minutes, if there are
    issues that we did hit on here, that you think are important,
    we would like to hear about them.
        Mr. Dicken. Well, I think the hearing has well-addressed
    some of the challenges that oversight faces within the context
    of FEHBP and the plan's contracts with PBMs. I guess I would
    just note that this is not an issue that is unique to FEHBP. I
    can speak to GAO's experience also.
        For example, with Medicare Part D. That is an area where we
    have been working since 2007. In that case, plans are required
    to report price concessions or rebates they may get to CMS;
    however, CMS and HHS have interpreted the legislation that
    created Medicare Part D as not allowing to disclose that to
    GAO. GAO has been working with committees, including this
    committee, for legislative clarification that GAO indeed, would
    have access to that information for Medicare Part D, in fact.
        Mr. Lynch. You said a legislative fix? Or is that a
    regulatory fix?
        Mr. Dicken. It is a legislative, well because there is a--
    HHS has interpreted the legislation. We are seeking legislative
    clarification that GAO does have access, under its broad
    authority.
        Mr. Lynch. Is there a bill out there right now that gives
    you that access?
        Mr. Dicken. There is a bill, HR2646.
        Mr. Lynch. Who is sponsoring that?
        Mr. Dicken. Pardon me?
        Mr. Lynch. Who is the sponsor?
        Mr. Dicken. I can get back to you on that.
        Mr. Lynch. OK. We will figure it out. I thought you might
    know. OK. Thank you. I didn't mean to interrupt, but please go
    ahead.
        Mr. Dicken. I think that is what I wanted to highlight.
    Thank you.
        Mr. Lynch. OK. Thank you. That was helpful.
        Rear Admiral McGinnis.
        Admiral McGinnis. Mr. Chairman, I think that transparency
    is probably the most important thing on both sides. Our PBM
    must pass through all rebates benefits. They are not able to
    even negotiate rebates. Everything is a pass through to the
    Government. We negotiate the rebates with the pharmaceutical
    company. Everything on our side also has to be transparent. We
    put our formulary on the open Web, everybody can see our
    formulary. Our formulary committee minutes are put up on the
    Web. We have a beneficiary advisory panel, advising us on that
    formulary. Bringing things to our attention to consider, before
    we make changes to that formulary.
        We have good feedback from that beneficiary organization.
    We incentivise our PBMs properly so that they come back
    consistently with a 95 percent or better beneficiary
    satisfaction rating to get the monetary incentives that we put
    in our contract. And we feel that these types of things work
    very well for us. The formulary placement of medications has
    brought us great results with the pharmaceutical industry. They
    have been willing to give us much better pricing than the
    Federal ceiling price for that formulary placement.
        Mr. Lynch. Very good. Thank you, Admiral. And thank you for
    your service to our country.
        Ms. Kichak, 2 minutes.
        Ms. Kichak. We are very concerned about drug costs, because
    they are 30 percent of our program, and we want to know
    everything we can about drug costs so that we can find the best
    way to deliver them and the most cost-efficient way to serve
    the Federal employees and retirees. We are working with our
    Federal partners. We are working with TRICARE to understand
    their system.
        We are exploring all options, including options we have
    tried before and didn't fail. And we are responding as quickly
    as we can to suggestions to make more information available to
    our Inspector Generals. So we are going to keep working on this
    problem until we make it better in some fashion or another.
        Mr. Lynch. Thank you, Ms. Kichak. I want to thank you all
    for your willingness to come before the committee and help us
    with our work. And you can tell Director Berry that we
    appreciate the participation and cooperation of OPM as well.
    Thank you all, and have a good day.
        Ms. Kichak. Thank you.
        Mr. Lynch. Thank you for your patience. I know it has been
    a long day. It is the custom of this committee, that all
    witnesses to testify are to be sworn. Could I ask you to please
    rise and raise your right hands?
        [Witnesses sworn.]
        Mr. Lynch. Let the record indicate that all the witnesses
    have answered in the affirmative. I am going to offer brief
    introductions of each of the witnesses, and then you will be
    allowed 5 minutes for an opening statement.
        Dr. Jack Needleman is currently an associate professor in
    the Department of Health Services of the UCLA School of Public
    Health. In 2007 he was inducted as an honorary fellow of the
    American Nursing Academy. Before beginning his tenure at UCLA,
    Dr. Needleman was a member of the faculty of the Havard School
    of Public Health.
        Dr. Ralph de la Torre is a nationally renowned cardiac
    surgeon and an innovative health care businessman. Dr. Ralph de
    la Torre became the president and CEO of Caritas Christi Health
    Care, three facilities in my district, a matter of disclosure.
    In April 2008, with 12,000 employees, Caritas Christi is the
    11th largest employer in Massachusetts. As CEO, Dr. de la
    Torre's mission is to revolutionize the delivery of health care
    in the region by moving integrated clinical services out into
    the communities where patients live. In addition to his
    clinical endeavors, Dr. de la Torre has served as a health care
    consultant.
        Mr. Mark Merritt is the president and CEO of the
    Pharmaceutical Care Management Association. The National
    Association Representing America's Pharmacy Benefit Managers,
    lower prescription drug costs for more than 200 million
    Americans, and managed about 70 percent of the more than 3
    billion prescriptions dispensed in the United States each year.
    Mr. Merritt has served as a senior strategist with America's
    health insurance plans and the pharmaceutical research and
    manufacturers of America.
        Welcome, gentlemen. Dr. Needleman, you now have 5 minutes
    for an opening statement.

     STATEMENTS OF DR. JACK NEEDLEMAN, ASSOCIATE PROFESSOR IN THE
      DEPARTMENT OF HEALTH SERVICES OF THE UCLA SCHOOL OF PUBLIC
       HEALTH; DR. RALPH DE LA TORRE, PRESIDENT AND CEO, CARITAS
      CHRISTI HEALTH CARE; AND MARK MERRITT, PRESIDENT AND CHIEF
     EXECUTIVE OFFICER, PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION

                    STATEMENT OF DR. JACK NEEDLEMAN

        Dr. Needleman. Chairman Lynch, members of the subcommittee,
    thank you for inviting me to testify. Let me add just one item
    to the biography that you provided, which is, prior to going to
    Harvard, I was vice president/co-director of the Public Policy
    Practice at Lewin-ICF, now the Lewin Group, a thing that has
    some meaning in these halls. You have my written testimony, so
    I simply want to highlight a few key points from it, some of
    which have been made today, but perhaps deserve one more hammer
    hitting the nail.
        The first point is simply that the Federal Employees Health
    Benefits Plans, by and large, are using the current standard
    practice of contracting with PBMs for their drug benefits. And
    measured against a standard of what you would pay if you were
    strictly retail, there is substantial savings.
        The industry-sponsored study published in 2008, or put out
    in 2008, that estimated that about 28 percent discount from
    retail, which I would say given its industry sponsor, should be
    treated as an upper bound. You know, that is a considerable
    savings, but it is not appropriate to be measuring the benefits
    of the PBMs structure in FEHBP, against retail. That is the
    wrong standard.
        We have seen some discussion today about other more
    appropriate standards, and I think it is very clear, that
    compared to other large Federal purchasers, there is
    considerable evidence to date that the FEHBP plans are getting
    smaller discounts than other Federal purchasers. We can't tell
    how substantial those discounts are, or what PBMs are being
    paid for their services because of a lack of transparency in
    PBM billing plans.
        To put it very simply, the PBMs buy on one schedule, they
    bill to the Federal Government and other health plans, on a
    different schedule. As has been discussed by prior
    participants, prior panel members, for generic drugs, the
    purchasing is built on an MAC, a Maximum Allowable Cost
    schedule, which will vary from PBM to PBM, and may vary from
    where they are getting the drugs across the plans, plus
    administrative fees. For unpatented, branded, sole-source
    drugs, they are paying a negotiated price. And that negotiated
    price has a whole variety of discounts and rebates that are
    potentially associated with them.
        The size of those discounts are a function of the
    bargaining power of the PBM. And in part, that includes the
    threat of whether or not to include the drug in the formulary
    or how well tiered it will be within the formulary of a plan.
    That is where the bargaining power to negotiate the discount
    comes from.
        The historic practice of the PBMs for actually billing the
    folks who have contracted with them to conduct these services,
    is either an aggregate amount or a percentage of wholesale, or
    some other measure, which may or may not make clear, typically
    doesn't make clear what was paid as costs for the drugs
    themselves, and what is being charged for administrative
    services.
        That lack of transparency has been heavily criticized by
    purchasers and consumer groups, and there have been some
    efforts to address it. The Human Resources Policy Association,
    the group of human resource managers for large businesses, have
    developed standards for transparency in pharmaceutical
    purchasing, which include charging the acquisition costs, both
    at retail and mail order for drugs. Passing through all rebates
    for manufacturers and other pharmaceutical manufacturer
    revenues that the PBMs are receiving, and the right to audit,
    that those practices have been fully implemented.
        These represent minimum standards, and many of the largest
    PBMs, including the key PBMs in the FEHBP Program, have
    actually signed on to that. However, the PBMs offer the plans
    the option of traditional pricing, or transparent pricing. And
    the pricing they have offered under transparent pricing,
    according to Ms. Hayes, who was here earlier, has been
    substantially higher.
        Clearly, as many industry observers have noted, there
    should be some skepticism about the industry's willingness to
    meet the commitment it has formally signed on to for
    transparency. If you ask for my recommendations on directions
    to go in, I would say that at a bare minimum, the FEHBP Plans
    should demand and enforce contract billing provisions for
    costs, separated from the administrative charges and profits
    that are being made. So, separate billing provides for a clear
    accounting of the costs of the drugs, the administrative costs
    and fees being paid to pharmacies and other third parties, and
    the administrative profits and fees associated with the PBMs
    services.
        The FEHBP Plans, either collectively or individually, need
    to negotiate hard for appropriate administrative fees, and
    consider either make versus buy decisions, or going to a single
    vendor as TRICARE has in order to get a good deal for the
    Federal Government. They should also consider whether to use
    scheduled Federal prices, or negotiated prices, for FEHBP in
    lieu of going with the PBM negotiated prices.
        It is clear that PBMs provide a variety of services beyond
    negotiated prices, enrollment and eligibility determinations,
    claims paying, checks for drug/drug interactions, patient
    education, facilitating therapeutic interchange and appropriate
    use of generics. With more transparent pricing we would be in a
    far better position to access the cost and value of these
    services, rather than simply including them as the full package
    at a price that is not clear.
        Thank you for the opportunity to testify, and I would be
    happy to answer any questions.
        [The prepared statement of Dr. Needleham follows:]

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        Mr. Lynch. Thank you, Doctor.
        Dr. de la Torre, you are recognized for 5 minutes.

                   STATEMENT OF DR. RALPH DE LA TORRE

        Dr. de la Torre. Thank you.
        Mr. Chairman, I want to thank you for inviting me to
    participate in this hearing. The rising cost of health care, as
    we all know, is dealing a crippling blow to employers across
    the United States. Escalating premiums suffocate not only the
    employees but employers who struggle to provide a benefit to
    their employees. At the forefront of this escalation is the
    cost of prescription drugs. Controlling prescription drug costs
    is essential to containing health care costs.
        Unlike many other contributors to the cost of health care,
    prescription drugs serve not only in the treatment of illness
    but as a preventive measure. This is especially true in the
    treatment of chronic illness. Many recent reports document how
    escalating co-pays on pharmaceuticals lead to noncompliance on
    behalf of patients. This non-utilization can lead to the
    escalation of chronic illness, and the subsequent grave
    implications to patient and employer. As a specific example,
    patients who fail to comply with medications that control blood
    sugar or hypertension, are more likely to develop
    atherosclerosis which can lead to heart attack and stroke. For
    all these reasons, to describe but a few, it is imperative that
    an employer, through the benefits offered its employees,
    control prescription drug costs.
        Within the context of my comments, the Federal Government
    is the largest employer in the United States of America. Like
    all large employers the Federal Government should capitalize on
    its purchasing power to lower its cost of goods and services.
    In fact, this concept is at the very essence of our capitalist
    economy. Health care should be no different. When the largest
    employer in the United States addresses the cost of providing
    prescription drugs to its employees, the first step seems
    obvious. The Federal Government should use its purchasing power
    to secure preferential pricing for its insurance plans and for
    its employees.
        The next question is how? What method? What means does the
    Federal Government have to secure such pricing, without a time-
    consuming overhaul in health care delivery? In review of our
    current practice, I will propose one, but obviously not the
    only solution to stimulate some discussion.
        In 1991 section 340B of the Public Health Service Act was
    enacted. This act requires drug manufacturers to provide
    outpatient drugs to certain covered entities at a reduced
    price. This process was further simplified through the creation
    of a prime vendor. This process routinely yields pharmacy
    savings of 25 to 50 percent for the covered entities, beyond
    that of PBMs or GPOs. Rather than create a second parallel
    process for group purchasing, we should look to expand
    participation in this program to benefit some or all Federal
    employees and the U.S. Government.
        One relatively simple solution would be to modify section
    340B of the Public Health Service Act, and the subsequent
    Pharmacy Affairs Branch definition of what constitutes a
    patient, at a disproportionate share hospital, to simply
    include Federal employees within a geographical region. A
    qualifying entity could then establish an outpatient pharmacy,
    complete with mail order and internet capabilities, to provide
    prescription drugs at markedly discounted prices.
        In fact, many 340B hospitals already do this same thing.
    Since these entities are not allowed to resell or markup 340B
    prices, a minimal processing and handling fee would be the only
    incremental cost added to the below wholesale prices. This
    would not only provide markedly reduced prices, but a highly
    transparent pricing mechanism. This decreased pharmaceutical
    cost would be incorporated into the various health plans
    available to Federal employees, without limiting their choice
    of insurance product. These savings could then pass through to
    the employer, in the form of decreased premiums, and to the
    patient/employee in the form of decreased premiums and
    decreased co-pays.
        Mr. Chairman, I want to reiterate my thanks for inviting me
    to this hearing. I also pledge my assistance and the assistance
    of my organization, Caritas Christi Health Care, in combing
    through this difficult struggle of ensuring access, maximizing
    quality and minimizing costs in health care.
        [The prepared statement of Dr. de la Torre follows:]

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        Mr. Lynch. Thank you, Doctor.
        Mr. Merritt, you are now recognized for 5 minutes.

                       STATEMENT OF MARK MERRITT

        Mr. Merritt. Good afternoon, Chairman Lynch and thank you
    for your time. My name is Mark Merritt. I am president of the
    Pharmaceutical Care Management Association, the PBM
    Association. It sounds like I have my work cut out for me. But
    that is what we do. We are proud of what we do. We work for the
    large employers' unions, Government agencies, Medicare Part D,
    FEHBP of course, and so forth.
        And our clients aren't small players. They are big,
    sophisticated, savvy people who we negotiate very hard against,
    folks like the drug manufacturers. So it is kind of odd for
    everybody else to seem like the victim. We often feel that way
    ourselves as we are negotiating for lower prices, pushing for
    more generics, pushing for bio-generics and so forth.
        But we use a number of tools and strategies, to increase
    generic utilization. It is a lot more than just the unit cost
    of the drug that we are involved in. It is all of pharmacy
    costs. And we view ourselves not as the cause of the complexity
    of the system, but a result of it, in an a attempt to help
    payers sort through it. To sort through everything from
    manufactures retailers, wholesalers, everything that is
    involved using technology, e-prescribing, different forms of
    delivery, like mail service delivery and so forth. All of
    which, in different forms, FEHBP uses.
        But we are hired to create these benefit packages for
    different reasons, I would say, for instance in VA, or
    Medicaid, because we are hired by clients who want us to create
    good benefit packages that will retain and attract employees.
    Particularly the FEHBP, which competes against the private
    sector all of the time. So to use, I know this maybe a marginal
    example, but to use a tool like VA uses, of limited formularies
    of pharmacies, of which they can be dozens of miles away, is
    not the kind thing that FEHBP would want to use, even though it
    may well save them money.
        Again, it is the client's choice. And clients choose all
    kinds of different ways to save money. But for the record, the
    GAO and others have looked at what we do. The GAO has looked at
    what we have done at the FEHBP, as we have heard earlier. We do
    save money to the tune of hundreds of millions of dollars a
    year. The OPM has noted how much we save for them, and that we
    do it in a consumer friendly way. These aren't the old HMOs of
    10 or 15 years ago that saved money by keeping you from doing
    things and getting you what you need. We provide broad
    formularies, broad access, generous packages, lots of retail
    pharmacies, 60,000 retail pharmacies, and so forth.
        I should note that PBMs are accustomed to a great degree of
    accountability. We expect it. We get it on the front end, and
    the back end, and during the process. These sophisticated
    purchasers that work with us, not only are working through
    their HR departments, they hire very expensive lawyers and very
    savvy consultants to look over all of these contracts before
    they sign anything with us.
        And the Federal trade commission is noted as a very
    competitive process. There are lots of different PBMs. I know
    all of these guys are not very fond of each other. They will
    steal business in a moment from each other for any little extra
    bit of fat that is left on there. So the competition drives
    prices down more than you might think.
        It is important to note on the transparency issue, that it
    is something to be careful with. Intuitively it seems like the
    more you see the better off you would be. But we went through
    this during Medicare Part D, where there is a provision to make
    everything transparent in Medicare drug pricing. And the reason
    it was considered, I think it was by Senator Grassley and
    others, is because we need to save money and pay for the drug
    benefit, much like the discussions we are having now.
        They were surprised when it went to the Congressional
    Budget Office, and they found, not only didn't it save money,
    but actually increased costs by 10 percent. I think about $40
    billion. And people wondered why. And it was because,
    ironically, with transparency, especially when it is public,
    when any of the information can be made public through any
    means, the beneficiaries aren't the consumers, but it is all of
    the people we negotiate against. All the people who we play off
    against each other. The drug makers, drug stores and so forth.
    They are all competing with each other.
        And if they know what their competitor's pricing is, basic
    economics, so it is not really basic, it is a little more
    complex than that, but the basic practice is, that economists
    agree happen, is it reduces any interest to underbid their
    opponents because they know exactly how low they can go. And if
    they knew how low we got some of their opponents or some of
    their competitors, they would be surprised and they would price
    accordingly.
        So transparency, we are for it. There is no uniform
    definition of it. Different clients want it at different
    degrees. Some clients don't care at all as long as you hit your
    numbers. Others really want to pore through the books and see
    all kinds of different information. That is the client's
    decision. They can decide on the front end.
        But in conclusion, I would say that not only do we look
    forward to working with you and being helpful, we know this is
    complicated. That is why we are in existence. We hope that any
    future discussions of transparency, in FEHBP or elsewhere,
    focus not just on PBMs, but all of the providers in FEHBP,
    hospitals, physicians, nursing homes, independent drug stores,
    drug manufacturers, wholesalers and so forth.
        Because we are about 10 percent of the spend, and we are
    happy to be looked at, but if you are looking at a holistic
    view of this, everybody should be looked at. And I would also
    hope that any related legislative proposals that you do
    consider, that you consider maybe getting them scored from CBL
    on the front end, to see maybe how they can be made better, and
    also to make sure that the costs are fully understood, if there
    are costs.
        Thank you very much for your time.
        [The prepared statement of Mr. Merritt follows:]

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        Mr. Lynch. Thank you, Mr. Merritt.
        Let me start with Dr. Needleman. In your testimony, which
    was very helpful and we thank you for it. In your written
    testimony, you cited there were two different reports there, I
    believe. In trying to do an assessment on the Federal Employees
    Health Benefits savings from contracting with PBMs. The 2003
    GAO report, I think estimated 18 percent, and then there was
    another report, called the PCMA Report, that had estimated
    savings at 28 percent.
        Dr. Needleman. Right.
        Mr. Lynch. That is like a 33 percent difference. What do
    you think might attribute to that different assessment?
        Dr. Needleman. It all goes back to the cost base. The
    PriceCoopersWaterhouse Report, the 2008 report, was working off
    of retail prices. GAO was just looking at drug pricing, not
    taking into account the other services, but was looking at
    wholesale prices as their benchmark.
        Mr. Lynch. I see. Now the suggestion that you made, that
    folks breakout the costs and the profit administratively, have
    you seen other plans that break it out that way? And has it
    been helpful in those instances?
        Dr. Needleman. Well, one of the questions I would have
    asked the Rear Admiral if I had had a chance to ask him, was
    exactly what the pricing looks like under the TRICARE contract.
    And I would hope you do that since they, in fact, have straight
    FSS, or other negotiated prices for the drug components. There
    must be explicit pricing for the other components of the
    contract as well.
        Mr. Lynch. OK. Dr. de la Torre, thank you as well for
    coming down at my request, basically. I have to ask you, I was
    reading the Boston Globe this morning, and I saw that the
    unfortunate story on the severe budget cuts for Commonwealth
    care, and this is something that we are all dealing with, and
    it is that situation that puts pressure on us here to try to
    find savings in these different program. But this action in
    Massachusetts will no doubt have implications on the national
    health care debate. I think we are looking at different
    examples, different models, and as a participant of that
    program, do you have certain observations that might be
    instructive to us during our debate here. What went wrong? And
    what perils we might avoid?
        Dr. de la Torre. Sure. Thank you. I think that the
    fundamental problem is that there is really three components to
    health care reform, or health care delivery. Which is really
    access, cost and quality. And you can't deal with one, i.e.,
    access, without really intertwining the other two, cost and
    quality. You can't, without addressing the structure of health
    care delivery say, OK we are going to open the doors to
    everybody, and not expect the cost to choke everybody or the
    quality to become abysmal.
        So I think the very discussion that is happening in this
    room, looking at other methods, other structures of providing
    health care, is the discussion that needs to be had across all
    of the components of health care. So I applaud you and the
    committee for looking at this very thing, but I think that is
    what needs to happen. We have to look at health care's entire
    structure, not just demand increased access and expect it to
    not choke us.
        Mr. Lynch. Unfortunately, we have a tendency to look at the
    fastest mover, and what we are seeing is the price of
    pharmaceuticals rising at a much faster rate, than say
    hospital-based care. And I know some of that, at least some of
    that, is due to higher utilization rates. These new products,
    new pharmaceuticals actually substituting for what was
    previously in-house care.
        Let me ask you that. You were on one of those financial
    shows the other day, CNBC, or something like that, and they
    asked you what are the drivers of costs and you mentioned
    utilization.
        Dr. de la Torre. Yes.
        Mr. Lynch. And for your facilities, your system, I am very
    familiar with that, how is that a driver? We were looking at
    the unit costs and product costs, as Mr. Merritt mentioned, how
    is that utilization rate a driver of costs?
        Dr. de la Torre. If you look at the actual per episode
    health care delivery, there is not a lot of profit in it. Most
    nonprofit hospitals have margins of 1 percent, 2 percent. Last
    year I think in Massachusetts, the average community hospital
    net margin was less than 1 percent. So I mean, those are not
    margins that drive the Exxons of the world, obviously.
        So what is driving this? What is going on? You know, a lot
    of us think it is utilization. It is, we are using too much
    health care. It is not that the price of every unit, let us put
    prescription drugs aside as too high. And what drives that?
    Well, there are three basic components that drive utilization.
    One is, which we have heard a lot about, is preventative, it is
    defensive medicine. It is physicians who over-order studies,
    who do too many tests, too many examines to kind of prevent
    themselves from getting sued.
        Another component is what I call medicine as a vocation
    versus a business. And Dr. Atul Gawande had a great article in
    the New Yorker not long ago, The Cost Conundrum, which I
    encourage all to read, which addresses this. Which is in some
    how and in some locations, a group of health care providers,
    physicians or hospitals, medicine stopped being a vocation and
    became a business. And if it is a business, then obviously
    increased utilization makes the business more profitable. And
    that becomes a driver in and of itself. It becomes the culture
    of the location.
        And then the third component is society-driven utilization.
    We as a society, and this is where drugs really come into play,
    we as a society are convinced that if it is newer and more
    expensive, it has to be better. We as a society spend 25, I
    have heard estimates up to 30 percent of all health care costs
    in the last 6 months of life, because as a society we want to
    live forever. We as a society are very proactive on high end
    surgery, high end medicines, have to be better than just basic
    care and preventative care.
        So I think those three components really drive utilization,
    and are really driving the cost of health care across the
    United States, including pharmaceutical benefits through the
    roof.
        Mr. Lynch. Let me ask you then, as an employer, I think in
    your introduction I said that Caritas was 7th or 8th in size of
    employer, you mentioned this before in our meeting a few weeks
    ago, how do you address the needs as an employer for your
    folks?
        Dr. de la Torre. Well, the things that we are doing is we
    are going heavily into primary care. Trying to really emphasize
    the preventative medicine. Try to emphasize the contacts with
    the primary care physician rather than being tertiary driven.
    We have our own insurance plan, and interestingly enough, we
    run 340B pharmacies through it, which is a marked reduction in
    cost.
        Mr. Lynch. Explain how that works, because I think just for
    someone who is listening and not terribly familiar with the
    process.
        Dr. de la Torre. So on the 340B program, as I was saying,
    it entails us to buy drugs in disproportionate share hospitals,
    certain high end disproportionate share hospitals, at a
    markedly reduced price, statutorily. Some would say an unfairly
    reduced price. That is a separate discussion. And what we do,
    is since our employees become our patients in a limited network
    product, then they become patients of the hospital. They buy
    pharmaceuticals, and we can give them pharmaceuticals through
    our hospital pharmacies, which get the 340B pricing.
        And that is a marked reduction, well below anything that we
    can get through PBMs and GPOs for our whole hospital, and we
    have a fair amount of purchasing clout, as you know. We do
    between 250 and 300,000 emergency room visits in our system. We
    do about a million outpatient visits. We do 80 to 100,000
    discharges, ballpark figures. So we have a fair amount of
    market clout. But the 340B pricing really allows us to take it
    to the next level down.
        Mr. Lynch. Now do you have a gatekeeper type feature on
    your own health benefit plan, or even pharmaceutical?
        Dr. de la Torre. We don't really establish a gatekeeper
    philosophy. We are trying to, and we are in the process of
    really incorporating IT. We are spending, as you probably know,
    $70 million over 3 years in IT to go completely paperless. Not
    only the hospitals, but all 1,200 of our Caritas Christi
    network physicians are going to be on electronic health records
    within the next year, 18 months. And all of that is going to be
    tied to our pharmacies also.
        We are also bringing in, we have just signed a partnership
    deal with Microsoft, that is going to provide health log
    benefits to all of our patients so they can manage and be part
    of their own health care. I think a lot of this is, in health
    care overall, is pushing it out to the home. Pushing it out to
    the patients, out to the communities, where care is. It can be
    centered, be more preventative and also be more cost-effective.
    You know how much it costs to provide health care in Boston,
    not because anybody is ripping anybody off, but because a
    parking space recently sold in Boston for $300,000, so cars
    have to be put somewhere.
        Mr. Lynch. Right.
        Now, Mr. Merritt, I understand the competitive model that
    is referred to with pharmacy benefit managers; however, in
    practice, or at least from where I sit, there is so much
    complexity there, that it is difficult to see how folks could
    compete on price, when you can't even figure out what the price
    is. And it is especially difficult for some of these plans that
    might not have the degree of sophistication that is necessary.
    I mean, when my auditors can't figure out what the price is,
    and they are professionals in that specific area, how does that
    competitive model actually work if you have such complexity
    there and lack of transparency?
        Mr. Merritt. Well, first of all, not many people do what
    you are doing right now, and I applaud you for it. Really
    taking the time to try to learn it. It is very complex. But the
    savings are real, because it is not just about the drug unit
    costs, it is about relationships with drug stores, and
    wholesalers and manufacturers. It is about using technology.
        We championed a bill last year on electronic prescribing
    and Medicare, which the president added more funding to in the
    stimulus package, which we really appreciate. It is a people
    don't know what their drugs are, they don't know what drugs are
    out there that they are taking, they don't know the cost share,
    and they don't know the alternatives. The doctors don't know.
    So there is a big lack of knowledge there in the physician
    community.
        In terms of how drugs are negotiated, you are right, going
    up against the pharmaceutical industry isn't easy. But it is a
    competitive system. And I always say this, people don't have to
    use a PBM, and I don't say that in a kind of snide way, it is
    just that we add real value and people pay us to do things and
    they wouldn't do that unless the savings were really big. And
    again, these unions and automakers, these are not pushovers,
    and the Medicare Part D program, which has rigorous
    transparency, rigorous accountability, lots and lots of
    regulations.
        So we can deal with that because we do add value. But the
    only thing I can say, and the specific answer to your question
    is, our job is always to remain on the cutting edge in finding
    out where any fat is. We are kind of like the shark in the eco
    sphere, nobody really wants us there, but we play a vital role
    of keeping things going, keeping folks honest. And it is very
    hard.
        But it is very effective. The savings are real and most of
    the things that are said about PBMs are said by folks from
    either the drug store community or a pharma or others, and then
    honest people, who just sincerely are trying to figure it out.
    But when folks like GAO or the Federal Trade Commission or
    others look into it, really do a thorough, exhaustive study,
    the results are usually pretty good and usually validate what
    we do and that it adds real value.
        Mr. Lynch. That has never been in question. I believe you
    were here for the testimony of the Inspector General for the
    Office of Personnel Management, and despite his description of
    the difficulties that he was having in ascertaining value and
    wading through the complexity of it, he said that the pharmacy
    benefit managers were a good deal, a good model to use and were
    of high value. But we did say we have a lot of work to do in
    order to make it more transparent so that we can be assured of
    that.
        Mr. Merritt. Can I give you one more example? I don't mean
    to belabor this but, there are a lot of tools that don't get
    used because of special interests, for instance, home delivery.
    Seniors love it in Medicare, a 90 day supply, it saves a ton of
    money, increases adherence, people love it. Medicare could save
    probably $30 billion over 10 years if they used that more
    aggressively. I am sure FEHBP and other programs could too. But
    because of pressure from various special interest groups who
    don't want that to happen, like the independent drug store or a
    lot of your others, it is always held back.
        Mr. Lynch. I am sorry, Mr. Merritt. What are they not
    taking advantage of?
        Mr. Merritt. Home delivery, mail service delivery.
        Mr. Lynch. Oh. I see. Yes.
        Mr. Merritt. Some retailers use it. PBMs use it. It saves a
    fortune. Very, very popular with consumers, and we are always
    encouraging clients to use it. More clients are using it now in
    these economic times because it saves money and they realize
    their people like it. But sometimes policymakers have a tough
    time addressing that because of other concerns. And so we would
    say that on issues like that, on issues like bio-generics,
    which we strongly, strongly support, there are policies that
    can help move this along. And we want to do our part, as PBMs,
    but we also want to offer any counsel we can of ways that we
    think can help finance health reform or other things that you
    are looking to finance.
        Mr. Lynch. I appreciate that.
        Dr. Needleman, earlier, in your written testimony anyway,
    you mentioned that the HR Policy Association certifies PBMs
    that comply with certain standards. Do you know if the larger
    pharmacy benefit managers like Medco and CareMark,
    ExpressScripts, that were mentioned earlier, did these folks
    have that same certification?
        Dr. Needleman. The short answer is yes. A large number of
    them do. There is actually on their Web site, which is cited in
    my testimony, there is a list of which PBMs have been certified
    by the program, and it includes a number of the large ones that
    are currently operating within FEHBP.
        Mr. Lynch. And if they agree to meet those standards, are
    they required to do so across business lines. Can they do it in
    one area and be in noncompliance in another?
        Dr. Needleman. Based upon the conversation I had with Ms.
    Smith, yes, on the first panel----
        Mr. Lynch. Oh. Sue Hayes.
        Dr. Needleman. Yes. Prior to the first panel, what she
    indicated is the PBMs are offering transparent pricing, and
    they were also offering traditional pricing. And the net prices
    that are coming out for some reason that cannot explain by any
    economics I have been trained in, the transparent pricing is
    coming out higher.
        Mr. Merritt. I can explain that, if you are interested, but
    that is another issue.
        Mr. Lynch. Mr. Merritt, do you want to take a crack at
    that?
        Mr. Merritt. I will. I will. I am sorry. If I don't do it
    nobody else will.
        Mr. Lynch. That is why you are here.
        Mr. Merritt. That is why I am here. I will play my role
    here. The reality is the market dictates what we do. These
    companies are not fans of one another, these PBMs. They are
    looking to steal business all the time. If clients want a
    transparent product that is cheaper and it can be priced for
    that, they are going to get it. All of this implies that there
    is some sort of conspiracy to avoid transparency----
        Mr. Lynch. You have to admit, it doesn't look good. When
    you have to pay extra for transparency.
        Mr. Merritt. I know. But the reality is all of our
    companies would say they have transparent products that are
    better than their competing companies. They are transparent in
    different ways. But we do know this, the marketplace is very
    agnostic on transparency, mostly they just want to hit their
    numbers. I mean in other words, they see transparency as a
    subset of the cost issue. When costs go up, they want to say,
    hey, why are the costs going up. Where is the fat in the
    system? I want to know what is going on.
        If there is transparency and it doesn't reduce costs, and
    this gets back to what CBO and others have said, that is a
    problem. If there were more transparent products that save
    money, our companies would be all over it. They know what folks
    like you are looking at, and regulators and policymakers. They
    want to be as transparent as possible. They want to position
    themselves as the transparent, cheaper company. So to the
    degree that they are able to do that, they will. Where they are
    not willing to go, is a situation that will open up all of the
    pricing strategies with drug companies and the drug stores, to
    the drug companies and the drug stores, either through
    consultants or others. They put us in a position when we are
    negotiating, of playing poker against these guys with all of
    cards facing up, and we can't negotiate any savings.
        So just from pure market, pure selfishness, pure market
    forces, any of our companies would love to offer a transparent
    product that was much cheaper, if one existed, and to the
    degree there are those, they are going to offer them.
        Mr. Lynch. OK. Earlier today we were talking about the
    possibility of classifying the PBM as a subcontractor,
    requiring them to--and I am actually going to introduce
    legislation to do just this, get them into that Federal
    Acquisition Regulation, because I can't understand the system
    you are using now, so I am actually trying to translate what
    you are doing into an understandable format, so that we can
    figure out what we are paying here.
        It seems like a lot to do, to just get some clarity on
    this, but I am willing to do it because I don't think there are
    that many more options. What is your response to that? How do
    you think your PBMs will respond to that? Being put, all of
    them, not just some, but all of the PBMs competing in that
    Federal acquisition regulatory format?
        Mr. Merritt. Well, we do a lot of different subcontracting
    work. I would have to brush up on what exactly the details were
    here. And I would also want to see, again, that it really saved
    money. And if there were transparency provisions that actually
    helped you get where you are going and generate a real savings.
    That is something that we would want to take a look at.
        We would mention, however, and this is an obvious point, I
    don't mean to go back to it but, FEHBP, despite everything we
    have heard today is a very popular program, including the drug
    benefit. People like it. You don't hear a lot of people, and
    maybe you do. I am not in FEHBP and you probably are. I don't
    hear a lot of people saying, gosh, I hate that FEHBP plan. I
    hear them saying, hey, it is pretty good. I am a Federal
    employee. It is one of the perks. It is why I am there.
        Mr. Lynch. But the taxpayer is picking up the tab.
        Mr. Merritt. Yes.
        Mr. Lynch. Do you know what I mean?
        Mr. Merritt. No, no. I agree.
        Mr. Lynch. They are not paying for it, so sure, it is a
    good deal.
        Mr. Merritt. You know it is a good deal, but then the FEHBP
    is always competing for employees and doing it on their
    benefits, so they don't want to skimp too much either. So we
    will give skimpy benefits, or generous benefits, depending on
    how much people want to pay and what they want to accomplish.
    But to answer your question, we would take a look at it is all
    I can say. I am not that familiar with it, but we would be
    happy to take a look at it and work with you and your staff on
    it.
        Mr. Lynch. OK. Well, as I have with the other two panels,
    obviously I didn't hit all of the landscape of issues that
    could arise in this, but I am going to ask you, if there is
    some area that we missed, or some area you wish to amplify or
    emphasize, just take 2 minutes, starting with Dr. Needleman.
        Dr. Needleman. Thank you.
        First I want to just reiterate the point that has been made
    by me, Mr. Merritt, others of the potential of real value added
    from the PBMs. They have real expertise in claims
    administration, drug/drug interaction, working with the
    pharmacies, working with patients, all of which should be
    acknowledged and is a service that is probably worth paying
    for. Having said that, everything that Mr. Merritt said about
    the role of the PBMs in dealing with clients, and providers and
    negotiation could also be said about health insurance and
    managed care providers, all operating under administrative
    service only contracts, with far more transparencies than we
    see in the PBM contracts.
        If we are looking at transparency, there are models. I
    would encourage the committee to take a closer look and get
    more information about exactly how TRICARE is paying for the
    administrative services under its PBM contract, given that it
    is paying clearly scheduled prices for the drugs themselves.
        Those are my specific comments about the nuts and bolts. I
    think one of the issues that the committee needs to think
    about, is the nature of the FEHBP program. It has been run as
    essentially a private sector program with the Federal
    Government operating as a private sector employer, in terms of
    the way it contracts with health plans. Some of the changes
    that I have heard discussed today, some of which I would
    possibly endorse, if with additional study, involve changing
    that relationship. The DOD relationship, the VA relationship is
    all very different than an employer relationship with health
    plans. So you need to think about whether you are really
    prepared to walk down that road in order to achieve cost
    savings.
        And finally, in that regard, part of the way in which the
    plans get cost savings, DOD, VA, is through a quite explicit
    use of formularies for sole-source, branded, patented drugs.
    The PBMs are also doing that and the individual health plans
    within FEHBP are doing that. So it is not unusual to see
    formularies in Federal plans, but in order to achieve some of
    the kinds of negotiated price savings that potentially you are
    talking about here, if you are going with a single point of
    entry for the Federal employees, you will have to be prepared
    to negotiate a well-constructed, well-thought through formulary
    that will apply to all of the Federal employees rather than the
    individual formularies that you are seeing in the FEHBP plans.
    You need to think about whether you are prepared to take that
    route.
        Mr. Lynch. Very helpful. Thank you, Dr. Needleman. Dr. de
    la Torre.
        Dr. de la Torre. Sir, I want to begin by just echoing what
    Dr. Needleman just said, about centralizing a formulary and
    really using the purchasing power of the Federal Government to
    its benefit. I think as we sit where we are now in health care,
    fundamental change needs to happen. It can't be small
    incremental change. We need to do something big and drastic.
        We have to get used to the fact as citizens, that we can't
    have everything all of the time in the most convenient
    location. It is just too expensive. I think it comes down to
    something very simple. I mean what is the cost of the drug,
    what do you pay the pharmacy, and the markup. And then
    everything else is a benefit or a potential service that is
    provided.
        And I think we just need to look at it that simply. I mean,
    the big pharma said, we are going to help provide $80 billion
    over 10 years. Well, if you use the FSS schedule, or if you use
    340B, hey, I just found the first $5 to $10 billion for them.
    They only have $70 more to find on their own. So I would take
    them up on it.
        Mr. Lynch. That is a great point. Thank you, Doctor.
        Mr. Merritt. First, I should have mentioned this earlier,
    but I did use to live in Norwood.
        Mr. Lynch. I knew there was something I liked about you,
    Mr. Merritt.
        Mr. Merritt. No. I was born in Virginia, but my next door
    neighbor was Chet Curtis, to age myself, I think he was married
    to Natalie Jacobson, I am not sure if it was before or after.
        Mr. Lynch. We won't go there.
        Mr. Merritt. We won't go there, but anyway, it is too late
    now but I thought I would throw it in there. I would just say,
    in conclusion, thanks for your time, thanks for all of your
    focus on this. Spending hours on this. I don't think I have
    ever seen a Member of Congress spend this much time on this. I
    really appreciate that. We feel like the more people learn
    about us, the better. We are not hiding from that. It is just
    difficult to explain this sometimes.
        I would just suggest that whatever solutions you offer in
    regards to transparency, that you don't make the mistake that
    the rest of the Medicare Program has made with doctors and
    hospitals, where you move to a cost plus basis. Where you say,
    well, I don't care what you do, and I am just going to pay you
    a little percentage on top, I just want to see everything you
    do.
        The danger in that, and again we have seen this with
    doctors and hospitals, but in the drug space the danger is, you
    want to make sure we have incentives to generate even more
    savings and for PBMs to compete against each other to generate
    more savings. You don't want a situation where we get paid the
    same amount if we dispense a generic or a brand. Or that if we
    don't care if it is delivered by mail or just at a drug store.
    If we are going to get paid anyway, why do we care. That is the
    one reason why the only part of Medicare that was saving money,
    is the one that we administer, Medicare Part D, which is coming
    30 percent under budget, which is unheard of for a Federal
    program.
        Now Med D is interesting because it is the biggest,
    probably the most successful Federal initiative that neither
    party wants to take credit for, but for whatever reason, it is
    working and we are part of it. And it is counterintuitive, but
    I would just make sure that the incentives are really strong.
    Because we can save a lot more money than we are right now. And
    hopefully, if there is a silver lining to this whole era of all
    of the deficits and so forth, it will let people and
    policymakers take a second look at other ways we can save
    money. So we would be happy to work with you on ways to do
    that. Thank you for your time.
        Mr. Lynch. Thank you. And on that note, we do appreciate
    your willingness to come here and help us. And this is an
    ongoing process. And the bottom line for us is the bottom line.
    We want to save money. There are no good guys and bad guys in
    this thing, we have an obligation here, to try to provide these
    products in health care at the lowest responsible price that we
    can for our Federal employees.
        But again, I want to thank you each for your testimony. You
    did a great job, helped the committee a great deal, and I want
    to thank you for your time here. Have a good day.
        Mr. Merritt. Thanks, Mr. Chairman.
        Mr. Lynch. This hearing is now adjourned.
        [Whereupon, at 6:23 p.m., the subcommittee was adjourned.]