[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


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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:]

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

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[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:]
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    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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    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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    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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    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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    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.]

                                 
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