[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
H.R. 4489, THE FEHBP PRESCRIPTION DRUG INTEGRITY, TRANSPARENCY, AND
COST SAVINGS ACT
=======================================================================
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
ON
H.R. 4489
TO AMEND CHAPTER 89 OF TITLE 5, UNITED STATES CODE, TO ENSURE PROGRAM
INTEGRITY, TRANSPARENCY, AND COST SAVINGS IN THE PRICING AND
CONTRACTING OF PRESCRIPTION DRUG BENEFITS UNDER THE FEDERAL EMPLOYEES
HEALTH BENEFITS PROGRAM
__________
FEBRUARY 23, 2010
__________
Serial No. 111-72
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
58-135 WASHINGTON : 2010
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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 L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of JASON CHAFFETZ, Utah
Columbia AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois ANH ``JOSEPH'' CAO, Louisiana
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
JUDY CHU, California
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, Chairman
ELEANOR HOLMES NORTON, District of JASON CHAFFETZ, Utah
Columbia MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois BRIAN P. BILBRAY, California
ELIJAH E. CUMMINGS, Maryland ANH ``JOSPEH'' CAO, Louisiana
DENNIS J. KUCINICH, Ohio
WM. LACY CLAY, Missouri
GERALD E. CONNOLLY, Virginia
William Miles, Staff Director
C O N T E N T S
----------
Page
Hearing held on February 23, 2010................................ 1
Text of H.R. 4489................................................ 26
Statement of:
Adcock, Daniel, legislative director, National Active and
Retired Federal Employees; Jacqueline Simon, Public Policy
Director, American Federation of Government Employees;
Colleen Kelley, national president, National Treasury
Employees Union; John Calfee, resident scholar, American
Enterprise Institute; and.................................. 108
Adcock, Daniel........................................... 108
Calfee, John............................................. 139
Kelley, Colleen.......................................... 126
McNeely, Larry, II....................................... 150
Simon, Jacqueline........................................ 117
O'Brien, John, Senior Advisor to the Director, U.S. Office of
Personnel Management; Patrick McFarland, Inspector General,
U.S. Office of Personnel Management; Sharon Treat, esq.,
State Representative from Maine and Executive Director,
National Legislative Association on Prescription Drug
Prices; Jasmin Weaver, healthcare initiatives legislative
director, Change to Win; Jonathan Boehm, president and
chief executive officer, Argus Health Systems Inc.; and
Richard Beck, Texas Pharmacy Business Council.............. 53
Beck, Richard............................................ 91
Boehm, Jonathan.......................................... 83
McFarland, Patrick....................................... 58
O'Brien, John............................................ 53
Treat, Sharon............................................ 65
Weaver, Jasmin........................................... 75
Weiner, Hon. Anthony, a Representative in Congress from the
State of New York.......................................... 44
Letters, statements, etc., submitted for the record by:
Adcock, Daniel, legislative director, National Active and
Retired Federal Employees, prepared statement of........... 110
Beck, Richard, Texas Pharmacy Business Council, prepared
statement of............................................... 93
Boehm, Jonathan, president and chief executive officer, Argus
Health Systems Inc., prepared statement of................. 85
Calfee, John, resident scholar, American Enterprise
Institute, prepared statement of........................... 141
Connolly, Hon. Gerald E., a Representative in Congress from
the State of Virginia, prepared statement of............... 51
Kelley, Colleen, national president, National Treasury
Employees Union, prepared statement of..................... 128
Lynch, Hon. Stephen F., a Representative in Congress from the
State of Massachusetts, prepared statement of.............. 4
McFarland, Patrick, Inspector General, U.S. Office of
Personnel Management, prepared statement of................ 60
McNeely, Larry, II, health care advocate, U.S. PIRG, prepared
statement of............................................... 152
O'Brien, John, Senior Advisor to the Director, U.S. Office of
Personnel Management, prepared statement of................ 55
Simon, Jacqueline, Public Policy Director, American
Federation of Government Employees, prepared statement of.. 119
Towns, Hon. Edolphus Towns, a Representative in Congress from
the State of New York, prepared statement of............... 173
Treat, Sharon, esq., State Representative from Maine and
Executive Director, National Legislative Association on
Prescription Drug Prices, prepared statement of............ 67
Weaver, Jasmin, healthcare initiatives legislative director,
Change to Win, prepared statement of....................... 77
Weiner, Hon. Anthony, a Representative in Congress from the
State of New York, prepared statement of................... 46
H.R. 4489, THE FEHBP PRESCRIPTION DRUG INTEGRITY, TRANSPARENCY, AND
COST SAVINGS ACT
----------
TUESDAY, FEBRUARY 23, 2010
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 2 p.m. in room
2154, Rayburn House Office Building, Hon. Stephen F. Lynch
(chairman of the subcommittee) presiding.
Present: Representatives Lynch, Towns, Cummings, Clay,
Connolly, Norton, Issa, Bilbray, Chaffetz, and Cao.
Also present: Representative Driehaus.
Staff present: William Miles, staff director; Aisha
Elkheshin, clerk/legislative assistant; Jill Crissman,
professional staff; Jill Henderson, detailee; Dan Zeidman,
deputy clerk/legislative assistant; Adam Fromm, minority chief
clerk and Member liaison; Howard Denis, minority senior
counsel; Ashley Callen, minority counsel; and Molly Boyl,
minority professional staff member.
Mr. Lynch. Good afternoon. The Subcommittee on Federal
Workforce, Postal Service, and the District of Columbia will
now come to order. I want to welcome Ranking Member Chaffetz,
members of the subcommittee hearing, witnesses, and all those
in attendance.
The purpose of today's hearing is to examine H.R. 4489, the
Federal Employees Health Benefits Program Prescription Drug
Integrity, Transparency, and Cost Savings Act. The Chair,
ranking member, and subcommittee members will each have 5
minutes to make opening statements, and all statements will be
open for 3 days to submit amendments for the record.
Before proceeding, I would like to ask unanimous consent
that Representative Steve Driehaus be allowed to join us to ask
questions and to offer testimony and appear before the
subcommittee here today.
Hearing no objections, that is so ordered.
I would also like to ask unanimous consent that the
testimonies of Mr. David Balto, navitist, the Coalition of
Government Procurement, and the Pharmaceutical Care Management
Association be submitted for the record.
Again, hearing no objection, so ordered.
Good afternoon everyone. Today the subcommittee convenes to
examine H.R. 4489, the Federal Employees Health Benefits
Program Prescription Drug Integrity, Transparency, and Cost
Savings Act. Simply put, the reason I introduced this
legislation was to lower the cost of prescription drugs in the
Federal Employees Health Benefits Program [FEHBP]. I will try
to avoid that acronym as much as possible.
In these economically challenging times it is unacceptable
to ask Federal employees and the American taxpayer to put up
with some of the irregularities that exist in the pricing and
contractual arrangement of the Federal Employees Health
Benefits Plan, which accounts for nearly 30 percent of the
Federal Government's total spend on the Federal Employees
Health Benefits Program.
If the Federal Employees Health Benefits Program wants to
remain a model for providing health benefits, then legislative
changes that allow for alternative prescription drug benefit
contracting and pricing are needed.
H.R. 4489 is the byproduct of nearly a year's worth of work
and research. As many of you will recall, the subcommittee
conducted an oversight hearing on this very issue back in June.
Moreover, last fall we held a public policy forum with key
stakeholders and public agencies to further analyze various
approaches to fixing what I would describe as an opaque and
flawed health benefit plan design.
What we have discovered is that our Federal employees and
retirees are not receiving nearly the best benefit at the best
price as it relates to prescription drugs. In fact, when
comparing Federal Employees Health Benefits Program drug prices
to that of other Federal programs such as the Department of
Veterans Affairs, the Department of Defense, Medicare,
Medicaid, and the Public Health Service 340-B program, the
Federal Employees Health Benefits Program is paying
substantially more for its drugs. That is despite having 8
million paying members.
Even more alarming is that a recent study on the cost of
generic drugs performed by one of our witnesses here today,
Change to Win, shows that having no drug coverage beats having
coverage under the Federal Employees Health Benefits Program.
How can people state that Federal employees have the best
health insurance in the country when people with no insurance
are paying less for their prescription drugs?
I am also baffled by the fact that even within the program
we see larger plans charging far more for prescription drugs in
comparison to smaller plans, despite having a sizable
difference in the number of enrollees. Does the market-based
concept of leverage not apply to Federal Employees Health
Benefits Program?
The legislation that my colleagues, Mr. Connolly and Mr.
Cummings, and I introduced is intended to not only lower costs
of prescription drugs in the Federal Employees Health Benefits
Program, but to also provide our Federal employees with a
safer, high-quality prescription drug benefit by affording the
Office of Personnel Management greater oversight authority in
the contracting and pricing of the Federal Employees Health
Benefits Program, prescription drug benefits specifically.
Prohibiting certain ownership relationships, requiring
pharmacy benefit managers to return 99 percent of all the
moneys received from manufacturers for Federal Employees Health
Benefits Program business, capping prices paid by the health
plan to the average manufactured price [AMP], restricting drug
switching by pharmacy benefit managers and requiring enhanced
transparency and disclosure of all contract terms and related
information.
In this day and age, when every effort is being made to
reduce Federal spending and to find money to fund health care
reform and other domestic policy priorities, the level of
ambiguity around costs and drug prices under the Federal
Employees Health Benefits Program is appalling, and this must
change.
As chairman of this subcommittee, I am committed to
providing the best benefits to our Federal employees to the
best price, and whether that is accomplished by the provisions
contained in H.R. 4489 or by agency regulation and contractual
changes like those issued by the Office of Personnel Management
yesterday in the Carrier Call letter makes no difference to me.
Let the end justify the means, as long as we aren't simply
maintaining the status quo.
I would like to thank today's witnesses for sharing their
thoughts, insights, and expertise on this complex issue. I
understand that several of you have come quite a way to be here
with us today, and I deeply appreciate your willingness in
helping the subcommittee determine how best to improve the
Federal Employees Health Benefits Program prescription drug
benefit for both the Federal employee and the American
taxpayer.
Again, I thank you for your participation and I look
forward to hearing from today's witnesses.
[The prepared statement of Hon. Stephen F. Lynch and the
text of H.R. 4489 follow:]
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Mr. Lynch. I would like to yield now to the ranking member,
Mr. Chaffetz from Utah, for 5 minutes for an opening statement.
Mr. Chaffetz. Thank you, Mr. Chairman. I simply want to
thank you for holding this hearing. I want to thank our
witnesses for coming and their expertise in sharing candidly
their thoughts and perspectives. I, too, want to save money for
Federal workers and, importantly, most importantly, the
taxpayers' money, and hopefully we can achieve that.
Again I thank you for being here.
I yield back the balance of my time.
Mr. Lynch. It is the custom of this subcommittee to swear
witnesses. We are graced with the presence of Congressman
Anthony Weiner. Mr. Weiner has represented New York's ninth
Congressional District in the U.S. House of Representatives
since 1999. He is currently a member of the Committee on the
Judiciary and the Committee on Energy and Commerce, where he
serves as the vice chair of the Subcommittee on Communications,
Technology, and the Internet. Before entering Congress,
Representative Weiner served in the New York City Council.
I am going to ask my friend to please rise and raise your
right hand.
[Witness sworn.]
Mr. Lynch. Let the record show that the witness has
answered in the affirmative.
My friend, Mr. Weiner, you now have 5 minutes for an
opening statement.
STATEMENT OF HON. ANTHONY WEINER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW YORK
Mr. Weiner. Thank you very much. I have prepared testimony,
but with your indulgence I would just like to submit that for
the record and just make a few remarks.
Mr. Lynch. Without objection.
Mr. Weiner. It is important that we understand that PBMs do
an important thing. They are a valuable tool. The way they work
is that a big employer who has an insurance company might not
want to be in the benefits management business and
pharmaceuticals might not know the ins and outs, so they hire a
PBM to take that market pool that they have that gives them
some clout in the marketplace and have someone manage that
clout.
The only question here is: who should benefit from that?
Should it be the person that hires the PBM, whether it be a
labor union, whether it be an employer, or whether it be in
this case the Federal Government? Or should it be the PBM,
itself? That is the only question.
The problem that we have is for us to figure out who should
derive those benefits, we need to know what benefits there are.
We don't have that knowledge right now. For example, if the
employees of the Federal Government hire a PBM to go negotiate
the best price for Lipitor, we don't know what that best price
they are getting is; all we know is that the PBM says, here is
the deal we got. It could very well be that there is an extra
$2 or $3 a dose that the PBM benefited from. And we may make
the decision as taxpayers, you know what, that is OK, we are
willing to pay that price. The PBM is doing a valuable thing;
they should get a piece of the action.
Transparency is very important, and that is what your
legislation seeks to do. I should point out that if there is a
point of consensus in the health care debate--although
sometimes my Republican friends don't acknowledge it--is we all
agree with the idea of using market-based solutions. For those
of us who support a single payer plan, we believe get the
biggest possible market to be able to negotiate for lowest
prices. All the health care plans that are out there take the
idea of having a big market, to use that market strength to
negotiate for lower prices, to use that. To do what Wal-Mart
does: take their big market pool and negotiate for the lowest
prices.
PBMs do help us do that. I don't think that anyone should
say that PBMs are not created for that purpose. The question
is: are we getting the fullest benefit of it?
Now, in the House version of the health care bill we have
PBM transparency for everyone, not just for Federal employees.
I believe in the Senate bill it is also in there, with the
philosophy being the same thing: we may agree or disagree with
what the PBMs are doing, but we should have transparency.
I think if your bill becomes law here is what we will find
that will happen: the PBMs will still have every incentive in
the world to negotiate for the best prices for taxpayers, but
we will have some insight. Did they get an extra rebate here
that maybe we want more of? And your legislation, which says
that 90 percent of what you save should go back to the taxpayer
seems like a reasonable transaction fee. With 10 percent they
are still going to do very well for themselves.
So I think that your legislation is very important. I think
that all of us should be able to agree. What is the point of
having this big buying pool if we are not getting the benefit
of it? That is what PBMs are in the business of doing; we just
want to make sure they are in the business of doing it for the
taxpayer, and that is the philosophy behind your bill and that
is why I heartily support it.
[The prepared statement of Hon. Anthony D. Weiner follows:]
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Mr. Lynch. Thank you, Mr. Weiner.
I realize that you have other committee obligations.
Mr. Weiner. I am a very busy man, Mr. Lynch.
Mr. Lynch. All right.
Mr. Weiner. As you know, this health care debate will
simply not proceed forward without my presence.
Mr. Lynch. Exactly. [Laughter.]
That is what I understand. So we are going to excuse you
and we are going to accept your testimony in full, and we thank
you for your attendance at this hearing.
Mr. Weiner. Thank you for your indulgence.
Mr. Lynch. And for assisting the committee with its work.
Thank you.
I would like to call our second panel, if we could.
Before we proceed with the second panel, I would like to
offer time to my colleagues for a brief opening statement. The
Chair now recognizes the gentlelady from the District of
Columbia, Eleanor Holmes Norton, for 5 minutes.
Ms. Norton. Thank you very much, Mr. Chairman.
Mr. Chairman, there are a quarter of a million Federal
employees who are not covered by FEHBP at all, much less by its
prescription drug program. That is a scandal. I am now talking
about people who can't afford to be in a program where the
Government presumably pays 70 percent of the cost, although
there is great cost shifting in FEHBP. And of these programs,
to have a benefit program or prescription benefit program where
there is no regulation, no negotiation, and no transparency
required by the FEHBP is beyond belief, especially when you
consider that prices for drugs for Federal workers have been
rising.
I did some work on the FEHBP, which is now modeled for what
we want to do in the health reform bill, and even the compact
we have has not kept prices down with FEHBP in the picture. So
I have no confidence in the prescription drug program, and I
think your bill, Mr. Chairman, goes some distance, particularly
in the transparency requirement--I would think that is 101 in
any Federal bill--in moving us ahead.
Mr. Chairman, I cannot believe. Let us analogize ourselves
to the biggest Fortune 500 company. What is it, Wal-Mart? Can
you believe that Wal-Mart, as the customer, would be buying
drugs from the same set of sources at different prices?
Wouldn't it be using its buying power to make sure that if it
were, to chase this analogy further, the DOD or the VA, that
those who work for the Federal Government were getting the very
same deal. That also escapes my understanding.
Mr. Chairman, what you are doing about what you took
testimony on at the last hearing concerning the conflict of
interest with some pharmacy owners could not be more important
in your bill. This has become a matter of national disgrace
because it is now all over the media about how these retail
pharmacy owned companies are bilking the public.
The time has come, Mr. Chairman, to move on your bill, and
I can't thank you enough for, early in the year, bringing us to
this point today where we are doing a direct hearing on your
bill.
Mr. Lynch. I thank the gentlelady.
The Chair now recognizes the gentleman from Maryland, Mr.
Cummings, for 5 minutes.
Mr. Cummings. Thank you very much, Mr. Chairman.
Chairman Lynch, I really do appreciate your holding this
hearing on the Federal Employees Health Benefits Program
Prescription Drug Integrity, Transparency, and Cost Savings
Act.
In June of last year, this subcommittee held a hearing to
examine the contracting and pricing model used in the FEHBP, as
well as trying to determine whether the program's drug benefit
program was a good value. We concluded that for both taxpayers
and for FEHBP subscribers, changes in the program's contracting
and pricing of prescription drugs was necessary in order to
ensure that the benefit was being administered in the most
fiscally responsible manner.
The FEHBP is the largest employer-sponsored health
insurance program in the country, covering over 8 million
workers, Members of Congress, and their families. Almost 30
percent of FEHBP premium payments are for prescription drugs.
One of the major discussions during the June hearing was around
the FEHBP being charged more for its drugs than other Federal
and commission programs.
I would agree with you, Mr. Chairman, and certainly Ms.
Norton that this is ridiculous.
During that hearing it was disclosed that it was difficult
to determine if the FEHBP health plans were receiving a good
price for their drug benefits because of the complexity and the
lack of transparency in these contracts.
On January 24th, I joined you, Chairman Lynch and
Congressman Connolly in sponsoring H.R. 4489, the FEHBP
Prescription Drug Integrity, Transparency, and Cost Savings
Act. This bill is designed to do several very important things:
create greater oversight authority to OPM relating to
prescription drug benefits. It will also require pharmacy
benefit managers to return 99 percent of all moneys received
from manufacturers to the FEHBP business. It will cap prices
paid by the health plan to the average benefit price, and
require total transparency and disclosure of all contract terms
and related information.
However, I understand that there are some concerns around
the bill in its current form claiming a reduction in the choice
and competition. Before we pass this legislation, we must look
at this bill very carefully from all angles, consider all of
the consequences, intentional and unintentional, and what
effect it will have on our care and health benefits program.
The subcommittee has worked with several groups with vested
interest in the legislation. The hearing will discuss this bill
and specific ways to amend the bill going forward and efforts
to strengthen it and ensure its intended purpose.
I anxiously look forward to the testimony of today's
witnesses and thank the chairman for his leadership.
I also remind all of us that our Federal employees give
their blood, their sweat, their tears to support all of us, and
in our economy today every dime that they can save on
prescription drugs or anything else is very, very important.
So with that, Mr. Chairman, I yield back.
Mr. Lynch. I thank the gentleman.
The Chair now recognizes the distinguished chairman of our
full committee, Mr. Towns of Brooklyn, for 5 minutes.
The Chairman. Thank you, Mr. Chairman. I don't plan to use
5 minutes, because I am actually here to thank you and, of
course, Mr. Chaffetz, for holding this hearing, and to say to
you, which is something you probably never heard me say before,
I am here to listen.
Mr. Lynch. I thank the gentleman.
The Chair now recognizes the gentleman from northern
Virginia, Mr. Connolly, for 5 minutes.
Mr. Connolly. I thank the Chair and thank the Chair of the
full committee. I am privileged and pleased to join with you,
Mr. Lynch, and with you, Mr. Cummings, as an original co-
sponsor of this legislation, which I think has the opportunity
to create enormous efficiencies and to save hundreds of
millions of dollars potentially in health care costs--something
I think all of us can unite behind.
This legislation does three things. First, it precludes a
single company from controlling both the PBM and the retail
pharmacy. The regulation is important because vertical
integration between the two eliminates market incentives
wherein the pharmacist negotiates for lower prices. Eliminating
this incentive through consolidation creates market conditions
in which prices will rise disproportionately.
Second, the bill prohibits PBM from switching prescription
drugs without a physician's consent. This important provision
ensures that Federal employees and their doctors, not
bureaucrats in the insurance industry, maintain control over
health care. For too long, PBMs have been able to switch to
more lucrative drugs without the physician approval, even if
those drugs are not as efficacious or beneficial to the
patient.
Third, the bill requires PBMs to return 99 percent of money
received from pharmaceutical manufacturers for business
conducted under the FEHBP. This provision ensures that
taxpayers' money is not being used to subsidize middle men who
don't actually contribute much to health care services. It also
protects Federal employees from predatory pricing in which PBMs
have reimbursed pharmacies for less than the amount paid for
the health care plan.
As Dan Adcock said in NARFE's prepared testimony on this
subject, we strongly believe that nothing should be left to
chance regarding OPM's ability to access information. For that
reason, we believe that transparency should ultimately be
legislated. When we had hearings, it couldn't have been clearer
that, frankly, we have to tighten up the regulation and
oversight of PBMs to make sure that, in fact, they are
delivering quality services for our employees and the requisite
savings we know are there.
I thank the Chair for holding this hearing and look forward
to continued collaboration with him.
[The prepared statement of Hon. Gerald E. Connolly
follows:]
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Mr. Lynch. I thank the gentleman.
As with the previous panel, Mr. Weiner, you understand that
it is the custom before this committee to swear all witnesses,
so I want to welcome our witnesses and ask you all to rise and
raise your right hands.
[Witnesses sworn.]
Mr. Lynch. Let the record show that all of the witnesses
have each answered in the affirmative.
What I will do is I will offer a very brief introduction of
each of the witnesses, and then we will have testimony from
each.
Mr. John O'Brien is the Director of Planning and Policy
Analysis at the Office of Personnel Management. He joined with
OPM in April 2009. Prior to that, Mr. O'Brien was the deputy
director for research and methodology at the Maryland Health
Services Cost Review Commission.
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 Council of Inspectors General
on Integrity and Efficiency.
Representative Sharon Treat is currently in her fifth non-
consecutive term in the Maine State House of Representatives.
Previously she serve four terms in the Maine State Senate,
including two as Senate Majority Leader. Representative Treat
is also the executive director of the National Legislative
Association on Prescription Drug Prices, a nonpartisan
organization of State legislators working jointly across State
lines to reduce prescription drug prices and to expand access.
Ms. Jasmin Weaver is the Healthcare Initiatives legislative
director of Change to Win, where she has been working on health
care policy, addressing issue including patient privacy,
medication errors, and PBM transparency and reform. Before
joining Change to Win, Jasmin worked for the Chair of the House
Health Care Committee in Washington State and worked on higher
education policy issues at Harvard University.
Mr. Jonathan Boehm has been president and chief executive
officer of Argus Health Systems, Inc., since 2006. As president
and CEO, Mr. Boehm is responsible for all aspects of pharmacy
benefit solutions offered to market by Argus Health Systems,
including nearly 600 million claims processed annually, and 20
percent of all Medicare Part D claims processed in the United
States.
Mr. Richard Beck is the executive director of the Texas
Pharmacy Business Council, a new independent pharmacy advocacy
organization dedicated to ensuring patient access to quality
pharmacy care services. Mr. Beck is also the vice president of
Pharmacy Affairs at American Pharmacies, which is a member-
owned, independent pharmacy buying co-op.
Welcome to all. Mr. O'Brien, you are now recognized for 5
minutes.
Let me just back up a little bit. You see this little box
in front of you? The green light signals that you may proceed
with your testimony; a little yellow light will indicate that
you should probably wrap up, you have about a minute; and then
the red light would mean that your time has expired.
Thank you.
Mr. O'Brien, 5 minutes.
STATEMENTS OF JOHN O'BRIEN, SENIOR ADVISOR TO THE DIRECTOR,
U.S. OFFICE OF PERSONNEL MANAGEMENT; PATRICK MCFARLAND,
INSPECTOR GENERAL, U.S. OFFICE OF PERSONNEL MANAGEMENT; SHARON
TREAT, ESQ., STATE REPRESENTATIVE FROM MAINE AND EXECUTIVE
DIRECTOR, NATIONAL LEGISLATIVE ASSOCIATION ON PRESCRIPTION DRUG
PRICES; JASMIN WEAVER, HEALTHCARE INITIATIVES LEGISLATIVE
DIRECTOR, CHANGE TO WIN; JONATHAN BOEHM, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, ARGUS HEALTH SYSTEMS INC.; AND RICHARD BECK,
TEXAS PHARMACY BUSINESS COUNCIL
STATEMENT OF JOHN O'BRIEN
Mr. O'Brien. Chairman Lynch, Ranking Member Chaffetz, and
members of the subcommittee, I am pleased to be here on behalf
of Director John Berry of the Office of Personnel Management to
discuss H.R. 4489, the Federal Employees Health Benefits
Program Prescription Drug Integrity, Transparency, and Cost
Savings Act.
I would like to submit a written statement for the record,
and I will summarize briefly here.
OPM commends Chairman Lynch and the subcommittee is
continued efforts to strengthen the agency is oversight
authority regarding FEHB prescription drug benefits.
Prescription drugs represent a significant portion of the $39
billion FEHB program, comprising almost 30 percent of all
expenditures, and are a valuable benefit to enrollees. In light
of its importance, we are committed to ensuring that the FEHB
prescription drug benefit is cost effective, transparency, and
provides enrollees with a comprehensive quality coverage.
The bill attempts to expand OPM's authority to regulate
drug benefits offered by FEHB insurance carriers, including
relationships with pharmacy benefits managers, pharmaceutical
manufacturers and pharmacies. The bill outlines a uniform
purchasing strategy for all FEHB carriers, including price-
based, on-average manufactured price. It prohibits certain
ownership relationship, restricts non-generic drug
substitutions by PBMs, and requires PBM transparency and
disclosure of all contract terms and related information.
OPM agrees with the subcommittee that transparency and
ethical business practices are an essential element of an
effective FEHB prescription drug program. Since 2005, our
carrier contracts have included PBM transparency requirements.
These requirements include restrictions and protocols relating
to PBM drug substitutions similar to those in the bill.
We are currently in the process of updating these
contractual transparency requirements and we are concerned that
this bill legislates PBM pricing and purchasing terms for FEHB
carriers. Requiring the use of specific contracting models and
pricing methods via legislation will not allow the program
flexibility in an industry where business practices are rapidly
evolving.
We believe that these models and methods would be better
addressed in the contracts with our carriers, allowing the
program and its health plans to accommodate changing industry
practices.
Additionally, there may be administrative costs for OPM as
well as carriers that would be passed on to enrollees as a
result of certain sections of the bill. For example, the bill
requires PBMs to comply with extensive reporting requirements
to the agency, carrier, and the enrollee. While we believe that
disclosure is important, a balance must be struck to ensure
that these administrative requirements do not impose
significant costs upon enrollees and the Government. We do
recognize that further efforts are needed to improve cost and
pricing transparency related to FEHB prescription drug
benefits.
Following the hearing that this committee had last June and
going forward, an agency work group, including representatives
of the OPM's Inspector General's Office, has been working on
contracting requirements using administrative authority
currently available to us. The Inspector General's Office was
instrumental in developing requirements for large providers,
including PBMs, that were incorporated in 2005. Their onsite
audit experience has proven very useful to the current work
group discussions.
The work group developed a set of transparency principles
to be followed when negotiating specific contracts by carriers.
These principles were spelled out in OPM's February 22nd
carrier letter which was sent out to carriers and has been
shared with the committees. One example is requiring pass-
through transparent pricing in contracts with PBMs in which the
carrier receives the full value of the PBM's negotiated
discounts, rebates, and other credits.
We will continue to work with the OPM Inspector General to
ensure that FEHB contracts are regularly updated and reflect
the changing marketplace, that transparency principles are
adhered to and enforceable.
In addition, we are reviewing a broad range of options for
improving our current contractual procedures and redesigning
how prescription drug services may be purchased. Many of the
options that we are investigating were identified by this
committee in its September forum. Our goal is to obtain the
best and most affordable product for our enrollees.
As the subcommittee continues to examine this important
issue, our agency remains willing to work with you. We would be
glad to provide technical assistance to address our concerns
with the specific issues in the bill.
Thank you for this opportunity to testify on the provisions
of H.R. 4489.
[The prepared statement of Mr. O'Brien follows:]
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Mr. Lynch. Thank you, Mr. O'Brien.
Mr. McFarland, you are now recognized for 5 minutes.
STATEMENT OF PATRICK MCFARLAND
Mr. McFarland. Good afternoon, Mr. Chairman and members of
the subcommittee.
To best serve the committee's goals of establishing
transparency and equity in the many protocols of prescription
drug costs, my testimony and discussion today will attempt to
contrast the work progress of OPM with the intent and vision of
your proposed legislation, providing, hopefully, a value-added
component for your final decisionmaking.
In our estimation, the single most important FEHBP issue
which OPM must resolve is the fact that it is dealing with PBMs
from a perspective in which the cost structure of the PBMs are
utterly non-transparent. This means that there is no objective
basis to determine now or in the future if the terms being
offered to an FEHBP carrier by a PBM represent an advantageous
arrangement.
From our perspective as the agency's audit component, we
find the absence of transparency to be deeply troubling;
however, with the recent work progress of OPM, I believe that
the agency is now moving with a firm purpose of amendment
regarding the PBM industry. For years, real corrective action
has been dormant, at best. OPM has certainly not been a strong
player in wrestling with the rising cost of prescription drugs.
Today, however, separate entities are responsible for a
forward thrust of enthusiasm. Namely, the health care expertise
of two senior advisors to the Director of OPM and the strong
focus and hard work of this committee to get something
meaningful accomplished.
Specifically, OPM, in concert with our office, will advance
certain principles that will be incorporated into existing and
future contracts with fee-for-service health plan carriers such
as the Blue Cross/Blue Shield Association. These principles
will require the PBMs pass all discounts, rebates, and other
financial incentives or payments through to the carriers, and
that the PBM's only remuneration in connection with the
contract is from the FEHBP carrier, itself. In effect, the drug
cost passed through the carrier would be based on the cost of
the drug plus a reasonable fee for the PBM's services, such as
administrative fees. All relevant documents, including
contracts with drug manufacturers, would be available to my
office for audit.
If these principles are quickly and properly implemented by
OPM, I believe most, if not all, of my concerns about the lack
of transparency in the FEHBP PBM contracts will be resolved;
however, as always, the devil is in the details. For example,
without additional resources, it is difficult to see how OPM
will be able to fully implement these principles. Also, I am
concerned that the existing PBM contracts may be allowed to
continue for years before the new principles are incorporated.
It may be more prudent to require the fee-for-service carriers
to comply with the principles no later than 2012 plan year.
Finally, I am concerned that the principles may be changed
before they are incorporated into the FEHBP FFS contracts.
Presently, there are several proposed contract changes that
serve to implement the principles being introduced into the
FEHBP's pharmacy benefit program. The revisions are grouped
into the following categories: pricing requirements, document
access, electronic data access, the selling of utilization
data, financial benefit administration, and sanctions.
I have also several minor concerns with the act, itself.
For example, OPM may not have the resources or expertise to
determine maximum allowable dispensing fees. The heading
``civil monetary penalties'' is somewhat confusing because the
section deals primarily with False Claims Act rather than civil
monetary penalties.
The ability of PBMs to retain 1 percent of rebates may
result in current discount arrangements being converted to
rebates. Providing incentives to PBMs to reduce overall drug
cost is an excellent strategy; however, legislation should be
careful not to strictly limit incentive options.
It is questionable whether interim final regulations can be
issued within 6 months of enactment because of the complexity
of the subject matter and the lack of agency resources.
Despite my concerns, the status quo must be changed. I
believe that the amendment to the Federal Employees Health
Benefits Act on Pharmacy Benefits can be beneficial,
particularly if OPM does not quickly require FFS FEHBP carriers
to enter into the PBM contracts that require clear, pass-
through transparent pricing. A pass-through pricing model, in
our opinion, would be easier to administer and fair to all
parties.
All this having been said, I would respectfully suggest
that during further deliberations this committee might give
favorable consideration to the following: that the principles
presently being proposed by OPM be also addressed in this
legislation. My primary concern for making this request is that
if, in fact, OPM may be directed to be an integral part of the
health care reform, said inclusion of these stated principles
in legislation would guarantee that the issue would remain a
high priority.
In closing, I want to express a most noteworthy thank you
to this committee for this proposed legislation. Regardless of
the outcome, whether it be enacted into law or a decision is
made to allow OPM's substantive proposals to prevail, I can
state first-hand that this Office of the Inspector General,
especially our entire audit staff, applauds this particular
pursuit of accountability resulting in better Government.
Thank you.
[The prepared statement of McFarland follows:]
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Mr. Lynch. Thank you, sir.
Representative Sharon Treat, I bid you welcome. You are now
recognized for 5 minutes.
STATEMENT OF SHARON TREAT
Ms. Treat. Thank you very much.
Chairman Lynch and members of the subcommittee, my name is
Sharon Treat. I am an attorney, a Member of the House of
Representatives in the State of Maine, and director of the
National Legislative Association on Prescription Drug Prices,
where I work with over 400 legislators who receive our
electronic newsletter and provide information around the
country on a variety of prescription drug legislation, but a
good deal of it focused on pharmacy benefit managers.
I hope to provide a bit of a State perspective on H.R.
4489, which I wholeheartedly support, and also to offer a few
suggestions which I think would improve the legislation and
assure its effectiveness.
In 2003 I sponsored Maine's PBM law, which was the first in
the country to very comprehensively regulate pharmacy benefit
managers, imposing a fiduciary duty and requiring PBMs to
disclose possible conflicts of interest and pass through to
their clients, including the State of Maine and the State
Employee Health Plan, the full monetary value of the rebates
that they negotiate.
At least 18 States and the District of Columbia now require
oversight and/or regulation of pharmacy benefit managers. These
vary from very prescriptive legislation to fairly minimal
registration provisions. The States are responding to the
nearly absent Federal role regulating PBMs and the PBM business
model that relies on secrecy, convoluted payment transactions
that virtually no one can understand, and a model that is rife
with conflicts of interest.
I note that the Maine legislation that I worked on I did
with our then Attorney General, Steve Roe, at a time when we
had a consent decree ongoing with Medco, which imposed many of
the same provisions into the consent decree.
The Federal District Court decision which upheld the Maine
law, which actually went all the way up to the U.S. Supreme
Court, which denied cert, stated, I think particularly well,
what the problems are with the PBM business model, and it
addressed the advantages of regulation. The court stated:
whether and how a PBM actually saves an individual benefits
provider money with respect to the purchase of a particular
prescription drug is largely a mystery to the benefits
provider. This lack of transparency also has a tendency to
undermine a benefit provider's ability to determine which is
the best proposal among competing proposals from a PBM.
For example, if a benefits provider has proposals from
three different PBMs for pharmacy benefits management services,
each guaranteeing a particular dollar amount of rebate per
prescription, the PBM proposal offering the highest rebate for
each prescription filled could actually be the worst proposal
as far as net savings are concerned, because that PBM might
have a deal with the manufacturer that gives it an incentive to
sell or restrict its formulary to the most expensive drugs.
In other words, although PBMs afford a valuable bundle of
services to benefit providers, they also introduce a layer of
fog to the market that prevents benefit providers from fully
understanding how best to minimize their net prescription drug
cost.
I would note that H.R. 4489 appropriately addresses many of
these issues, including drug switching, failure to pass through
the value of rebates and other discounts, discriminatory
practices toward independent pharmacies, and lack of
transparency.
Based on the State's experience, regulation of Federal PBM
contracts will reduce employee health insurance costs and avoid
consumer harms caused by drug switching, errors, and conflicts
of interest.
Nonetheless, I believe there is room for improvement in
this legislation. One thing I would just parenthetically note,
in reading through the background materials on this
legislation, pharmacy costs making up 25 percent of this
Federal health employee plan, the fee-for-service plan, is a
very high percentage spent on pharmacy. It is really out of
whack when you look at what the percentage is in other
programs, other policies nationwide, in terms of a percentage
of health care costs, and also Medicaid.
So specifically what I think this legislation should be
doing, though, in addition is that I think that the conflict of
interest provisions need to be tightened up. It is great that
the legislation prevents conflicts that involve a controlling
interest; however, there are many conflicts of interest built
into the PBM business model which result in higher prices or
have other negative impacts which don't rise to a controlling
interest. At the very least, H.R. 4489 should explicitly
require PBMs to disclose in writing ``any activity, policy, or
practice that directly or indirectly presents any conflict of
interest.'' This is language currently in Maine law, so you
won't be breaking any ground.
And then, in addition, we would ask that you consider
adding a fiduciary duty provision to ensure that a PBM is
actually acting on behalf of the plan. For example, Maine law
requires a PBM to perform its duties with care, skill,
prudence, and diligence in accordance with the standards of
conduct applicable to a fiduciary in an enterprise of like
character with like aims.
In conclusion, I commend the sponsor for tackling this
important and rather difficult issue and taking a comprehensive
approach. We look forward to working with you and making sure
that comprehensive legislation is enacted that will cut the
cost of prescription drugs for Federal employees.
Thank you.
[The prepared statement of Ms. Treat follows:]
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Mr. Lynch. Thank you, Representative.
Ms. Jasmin Weaver, you are now recognized for 5 minutes.
STATEMENT OF JASMIN WEAVER
Ms. Weaver. Good afternoon, Chairman Lynch and members of
the committee. My name is Jasmin Weaver, and I am the
healthcare initiatives legislative director at Change to Win, a
6 million member partnership of five unions: SEIU, UFCW,
Teamsters, the Laborers, and the Farm Workers. Four of our five
affiliate unions represent Federal workers, and our members
across the country are facing rising prescription drug costs,
so we have a strong interest in improving the FEHBP and the PBM
industry.
We are thrilled to be here today to voice our unqualified
support for H.R. 4489. We believe this bill will save Federal
workers and the Federal Government hundreds of millions of
dollars, and we thank Chairman Lynch and the subcommittee for
your work on this important issue.
This bill is necessary because, although PBM can provide a
useful service, they are also in a position of trust that makes
it possible for them to engage in a variety of troubling
practices.
First, many PBMs provide virtually no transparency to the
health plans that they serve, refusing to disclose such basic
information, as you have heard today, as how much they pay for
the drugs that they help to provide.
Second, some PBMs engage in spread pricing, charging the
health plans they serve more for the drugs than they paid
pharmacies that then distribute those drugs to patients.
Third, PBMs may also switch a patient's drug to a drug
other than the ones their doctor prescribed, a drug more
expensive for the health plan and the patient, because that PBM
is getting rebates from drug manufacturers.
And, finally, some PBMs have merged with retail drug stores
or drug manufacturers, creating serious conflicts of interest.
This bill addresses all of these problems. It totally
enhances transparency, it bans spread pricing, it prohibits
drug switching that is designed solely to enhance the profits
of the PBM, and it reduces conflicts of interest in FEHBP drug
contracting by extending OPM's current ban on PBM contracts
that are with a PBM that is owned by a drug manufacturer, to
also extend that ban to PBMs that are owned by retail drug
stores.
By fixing these problems, this bill should significantly
reduce drug costs for Federal employees and the Federal
Government. Although the FEHBP is the largest employer-
sponsored health plan in the country, and thus should receive
the best prices, as you have heard today it is currently
spending 15 to 45 percent more for prescription drugs than
other Federal programs. Many other Government plans and private
employers have saved millions by switching to more transparent
PBM contracting. The Federal Government cannot afford to pass
up these savings, as the FEHBP currently spends over $10
billion a year on prescription drugs for the FEHBP.
Change to Win recently released a report that further
highlights the need for this bill. Our report focused on CVS
Caremark, a PBM drug store combination that currently manages
80 percent of the pharmacy benefit within the FEHBP. CVS offers
a generic discount program that any person can sign up for.
After paying $10, you get access to hundreds of generic drugs
for $9.99. So we compared this $9.99 price to the price that
Federal employees and the Federal Government pay under the Blue
Cross/Blue Shield Federal employee program, which is the
largest health plan within the FEHBP. What we found is that,
remarkably, FEP members and the Government together pay more
than $9.99 for 85 percent of the drugs on this discount generic
list, and sometimes far more--up to $200 more for the exact
same drug. Thus, FEP members and the Government are actually
made worse off by using their insurance to buy these drugs.
This underscores the need for greater transparency in the
FEHBP. It is hard to imagine that OPM and Federal employees
would agree to this situation if they knew what they were
really being charged. In fact, a recent poll of FEHBP members
found that 74 percent of them think that more should be done to
lower the cost of their prescription drugs, and 73 percent of
plan members surveyed would support legislation to do this.
In conclusion, the reforms in this bill take the FEHBP a
huge step forward, and that is why we wholeheartedly support
it.
Thank you for your time.
[The prepared statement of Ms. Weaver follows:]
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Mr. Lynch. Thank you.
Mr. Boehm, you are now recognized for 5 minutes.
STATEMENT OF JONATHAN BOEHM
Mr. Boehm. Good afternoon, Chairman Lynch and members of
the subcommittee. Thank you for inviting me to testify today.
Again, my name is Jonathan Boehm, and I am president and
CEO of Argus Health Systems. Argus is one of the largest
pharmacy benefit administrators, processing over 500 million
claims in each of the last 4 years. This total includes a
significant portion of Medicare Part D. We process 24 percent
of all Part D claims in the United States. We process claims
for customers with 5 million Part D members and 25 million
commercial members.
Our business model, however, is very different than many of
our competitors. We generally offer services on a fee-for-
service, fully disclosed, auditable basis. We refer to our
model as a transparent model, and we have been doing business
this way since 1999.
To provide context regarding transparency in the pharmacy
benefit, let me define what I mean by transparency. David
Calabrese stated in the May 1, 2006, issue of Managed Care
Executive, ``True transparency is a model in which all PBM
revenue streams are fully disclosed to the payer, the full
value of retail and mail order pharmacy discounts is passed on
to the client, data is shared with the client, and the client
is given ultimately decisionmaking control over its drug
benefit design and formulary management.'' At Argus we embrace
this business model and this definition.
In our transparent model we provide fully auditable access
to data, enabling our customers to comprehensively manage their
business for the benefit of their members. Consistently our
customers have told us when they transitioned to our model from
a traditional PBM they save 8 to 10 percent on their drug spend
day one.
Our customers achieve generic dispensing rates of well over
70 percent, compared to mid-60 percent industry averages,
because access to their data enables them to make more-informed
decisions and work with providers and members to achieve the
desired expense and health outcomes.
Another difference in the Argus transparent model is that
we do not own a mail order facility or drive members to mail
order; rather, we support 90-day prescription strategies that
support mail order and 90 days at retail, whatever method the
member deems most convenient for them. This is a significant
difference from PBMs that own mail order and drive utilization
to this distribution method, regardless of member preference.
There clearly are divergent views regarding the impact of
transparency on managing the pharmacy benefit. This committee
has heard and I have reviewed testimony from both sides of the
argument. After reviewing available Federal-Government-related
material, it is clear there is no consensus regarding the
impact of transparency on ultimate cost. There have been
reports of estimated increased costs, unknown impact on cost,
and the CBO recently scored the Cantwell transparency amendment
as budget neutral.
The position that the disclosure of sensitive price
information would negatively impact negotiating leverage of
pharmaceutical manufacturers and pharmacies appears to be
predicated on the premise that this information would be
generally available for public consumption. This bill clearly
treats this information as confidential and could only be used
by OPM, and I think invalidates the premise that it would raise
costs.
The final point that I would make regarding the importance
of transparency is I would suggest that it is more important in
the pharmacy benefit management than even in other industries,
and that is because the products and services are not procured
at a specific price but rather a pricing construct. Without
visibility into the true cost and rebate arrangements, the
pricing construct cannot only not be validated or audited, but
it is invalid by the premise that it is based on the
unknowable.
The Inspector General, Patrick McFarland, testified before
this committee in June and reiterated again today that the
single most important issue which OPM must resolve is that PBMs
are utterly non-transparent. He went on to say that we find the
absence of transparency to be deeply troubling.
In conclusion, it is my view that effective management of
pharmacy benefits is fundamental to reducing prescription drug
costs and improving the quality of health care outcomes in both
the public and private sector. Effective management of this
benefit is dependent on transparent access to the relevant
information.
Chairman Lynch, it is my view, given our customers'
experience as well as my research into the issues, that your
proposed legislation will be beneficial to OPM by enabling them
to have access to information so better decisions regarding
health care costs and outcome management can be made on behalf
of the Federal employees and ultimately the taxpayers. The
confidentiality provision that you have included will mitigate
the risk that disclosure of sensitive price information will
result in increased costs to administer prescription benefits.
Thank you.
[The prepared statement of Mr. Boehm follows:]
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Mr. Lynch. Thank you, Mr. Boehm.
Mr. Beck, you are now recognized for 5 minutes.
STATEMENT OF RICHARD BECK
Mr. Beck. Good afternoon, Chairman Lynch and members of the
subcommittee. My name is Richard Beck, and I am testifying here
before you today on behalf of the National Community
Pharmacists Association in support of H.R. 4489. NCPA
represents the interests of pharmacists, owners, managers, and
employees of more than 22,700 independent pharmacies across the
United States. We appreciate the opportunity to address the
topic of pharmacy benefits management regulation. I am also
executive director of the Texas Pharmacy Business Council,
which represents approximately 1,700 community pharmacies in
Texas.
Today I will share with you the reasons we support this
bill, as well as some of our experiences and lessons learned
from our PBM advocacy activities in the State of Texas.
Both NCPA and TPBC have long championed the need for both
Federal and State oversight of pharmacy benefit managers. That
is because our members and their patients continue to face
significant problems in dealing with these unregulated
entities. PBMs have been permitted to operate virtually
unchecked since their inception, slowed only by the increasing
amount of litigation alleging fraudulent and deceptive
practices filed against the PBMs each year, including the
Federal Government.
First I would like to speak in support of H.R. 4489, a
crucial piece of legislation that would provide OPM with
greater insight into the inner workings of the various PBMs
that currently manage the prescription drug benefits for FEHBP.
That is a tough one, isn't it, Mr. Chairman. We strongly
support H.R. 4489 for many reasons. It would require the
reporting and pass-through of the rebates that PBMs receive
from manufacturers. It would expose some of the questionable
practices that PBMs frequently engage in, including repackaging
and assigning different reimbursement rates for drugs dispensed
by their own mail order pharmacies.
It would prohibit PBM ownership of retail pharmacies,
thereby eliminating the inherent conflicts of interest that
results in higher costs and impaired quality of care. One has
to look no farther to justify this prohibition than looking at
the anti-competitive and anti-consumer activities exhibited by
the CVS Caremark Corp. merger.
Let me now talk about our experiences in the State of Texas
and how our legislature and Governor have been supportive of
PBM transparency in State contracts.
A few years ago the State of Texas concluded that the
disclosure of the business practices of PBMs in their dealings
with government entities is essential to ensuring that the
government entity is receiving high-quality, cost-effective
services. In 2006, a joint legislative committee issued a
report that detailed many of the questionable drug prices used
by the PBMs and recommend the State take steps to ensure that
they were getting the most bang for their buck with regard to
PBM services. Representative Treat testified before that
committee.
The State auditor followed up with its own study in 2008
and delved more deeply into the specific PBM contracts held by
various State agencies. The results of the study clearly
indicated that the State agencies needed to include in all
future PBM contracts provisions that clearly specified the
costs, discounts, and other fees associated with services
provided by the PBM, as well as provisions that would preserve
their ability to audit the PBM.
In 2009, after several years of considering various pieces
of legislation, the legislature passed PBM transparency
legislation. The passage of Senate Bill 704 now enables Texas
State agencies to share the terms and conditions of their PBM
contracts with other State agencies, as well as grant them full
audit rights over those contracts. In Texas we plan to pursue
followup legislation to buildupon the 2009 legislation.
The Texas PBM studies and consideration of related
legislation has provided an invaluable education to State
legislators and decisionmakers, alike, about the need for PBM
regulation, and has had a positive impact on the content and
terms of subsequent PBM contracts to the State of Texas.
The Texas State Employees' Retirement System, who
initially, along with CVS Caremark, opposed the 2007 PBM
transparency legislation in Texas, recently reported that the
terms of their contract include many of the elements of that
legislation, including 100 pass-through of rebates, and is
projecting a $260 million savings over 4 years.
Curiously, although CVS Caremark has apparently agreed to
these contract provisions, they and other large PBMs still
continue to oppose legislation to recognize these same
principles in State and Federal law.
In conclusion, I strongly urge you to pass the bill before
you today. The PBM industry, as they have done in Texas, is
likely to use scare tactics in an effort to convince you and
the American taxpayers that transparency may be harmful and
expensive and that they require secrecy to administer the drug
benefits of FEHBP. There is simply no credible evidence that
transparency has increased costs or will do so in the future.
I urge you to reject this paradoxical reasoning and insist
that OPM be afforded the disclosures necessary to negotiate a
fair contract in order to curb unnecessary prescription drug
spending.
Thank you.
[The prepared statement of Mr. Beck follows:]
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Mr. Lynch. Thank you, Mr. Beck.
I want to thank you all for your very helpful testimony.
Let me begin. I yield myself 5 minutes.
It is confounding, at best, to listen to the arguments of
some of the opponents of this bill to say that, as they have in
the past, that transparency is over-rated, and that somehow if
we let people know what things cost, then prices are going to
go up.
Ms. Treat, you have been terrific in offering some very
helpful suggestions to improve our legislation, and we really
do appreciate that. Let me ask you, you hit right on the point
of fiduciary responsibility, and putting fiduciary
responsibility on our PBMs so that their duty is clear and the
duty is enforceable on the part of the subscriber, in this case
the Federal employee.
How do you see this conflict that we have here, at least in
the case of CVS Caremark, where we have the PBM owned--the PBM
which I believe even now, without the legislation, has a duty
to the Federal employee to get the best price, while at the
same time they are owned by a pharmacy chain that is trying to
drive people in the door to maximize profit, which is clearly a
fine and noble and capitalistic motive, but it seems, at least
to me, that those interests are in conflict. I think that your
suggestion of imposing a fiduciary responsibility on the part
of the PBM gets right at that conflict. Could you offer your
own thoughts on that?
Ms. Treat. Yes. Thank you for the question.
I sponsored the legislation back in 2003. It took several
years in and out of the courts, actually, and it was the
fiduciary provision that was litigated, and it related to ERISA
plans, something you don't have a problem with in this case.
Nonetheless, we won that litigation. But that bill came out of
a similar situation involving a drug manufacturer, Merck, which
at that time owned MedCo, and so you had a conflict of interest
between a manufacturer with whom the PBM was supposedly
negotiating good discounts and rebates on behalf of whoever
hired them and a drug company, which had an appropriate goal of
maximizing its profits.
I think that there is a very similar problem now where you
have retail pharmacies and PBMs which also their ownership
overlaps.
We see now that one of the fastest growing segments of the
pharmaceutical drug spend is for specialty drugs, and there is
a real effort on the part of a number of entities to get into
that market and to have controlling or partial interest in the
specialty drug pharmacy area. There are a number of areas where
there could be conflicts of interest that would perhaps
dissuade a PBM from perhaps negotiating the toughest deal they
could with those entities.
Mr. Lynch. Right.
Ms. Treat. I think the reason that I am really recommending
looking at the language that you use in asking for disclosure
on conflicts of interest and perhaps having something of a
catchall provision with the fiduciary language is that we
cannot know today what new business models are going to be
dreamt up tomorrow.
Mr. Lynch. Right.
Ms. Treat. We often know that legislation that we pass and
regulation that we pass end up, a response is, well, what is a
good way to get around that to do something different. I think
the value of the Maine language is that it is designed to not
enumerate every single possible conflict of interest in
advance, but to have general enough language that, if something
arises in the future, it will be addressed.
Ms. Treat. Right. That is great. Thank you very much.
My time is pretty much expired. I was neglectful, however,
in failing to recognize the gentleman from California, Mr.
Bilbray, earlier for an opening statement and questions, so,
Mr. Bilbray, you are recognized.
Mr. Bilbray. Thank you, Mr. Chairman.
Just curiosity, Representative Treat. What is the
population of Maine today, just for my own information?
Ms. Treat. It has been hovering around 1.3 million for the
past decades, many decades.
Mr. Bilbray. Thank you. Everybody keeps moving out and
coming over to visit us in San Diego. Just shows you how the
shift has gone. Our county is 3.5 million, but the population
the way it shifts, I am just trying to remember the sizes here.
As a local legislator, I am interested in a lot of how these
work and how the process works through different levels.
Mr. Lynch. I thank the gentleman.
The Chair recognizes the gentlelady from the District of
Columbia, Ms. Eleanor Holmes Norton, for 5 minutes.
Ms. Norton. Thank you, Mr. Chairman.
Mr. McFarland, you have in your testimony some claims costs
per member. You note them increasing almost twice the amount
paid in 1999. Compared to what? How would that compare to
claims costs for other programs? Are there figures that would
allow us to measure those increases? You say, for example, drug
costs increase is an average 13.5 percent. That is cost as
opposed to claim cost per member. But in either case, how do
those compare with those not in a program like the prescription
drug program of the FEHBP? Mr. O'Brien.
Mr. O'Brien. In terms of the pharmacy cost for the FEHBP
program compared to other programs that would exist, one issue
that needs to be clear is it was stated earlier that the FEHBP
share of pharmacy spend compared to a large private employer
appears very high. That is always the case, because the FEHBP
program includes the coverage of Federal retirees, which a
typical private program would not.
Ms. Norton. The Federal program is what?
Mr. O'Brien. The Federal program includes Federal retirees,
in which case most of their costs are, in fact, drug costs, so
our percentage of drug costs relative to a large company----
Ms. Norton. Most of whose costs are drug costs? I am sorry?
Mr. O'Brien. Most Federal retirees, those who are over 65.
Ms. Norton. Oh, because of retirees?
Mr. O'Brien. So our drug cost----
Ms. Norton. Wasn't that true for many programs, retirees as
well as current employees are in the same program?
Mr. O'Brien. The FEHBP program is somewhat unique in that
when you look at our total costs, the retiree cost is with all
the other costs in there, so the statement that our pharmacy
spend as a percentage is very high is really comparing apples
and oranges.
Ms. Norton. I see. Since they are all in the same program.
Mr. O'Brien. Yes.
Ms. Norton. I understand. I am somewhat confused by your
testimony, Mr. McFarland, because it seems to say let us do it,
we are doing it, but there is a section of the testimony where
it does say that we will need some legislation, and you seem to
oppose legislation mostly because there were administrative
costs, which leads me to ask what about the administrative
costs that are built into what OPM does with FEHBP.
Mr. McFarland. Well, my understanding of----
Ms. Norton. I mean, are you, in fact, doing what the Lynch
bill does, perhaps stimulated by the Lynch bill? Or do you
concede that we do need legislation?
Mr. McFarland. As I said in my testimony, the previous
testimony that is on record and the shortened version that was
made today, is that I would suggest that what OPM is presently
doing--and that is that they are identifying the principles
that are very important to making transparency happen--that
those principles per se be considered to be put in the
legislation that we are presently discussing. So in no way did
I say that we shouldn't have legislation.
Ms. Norton. So you are saying it is important enough to
have them and to have them in statutory language?
Mr. McFarland. Well, and my particular reason for
suggesting that is that if, by chance, the direction is given
to OPM to be an integral player in the health reform act, then
I think that so much could fall between the cracks, and if it
is in legislation I think that probably would be very helpful
to maintain its priority.
Ms. Norton. In DOD and VA, are there multiple plans to
choose from, as with FEHBP?
Mr. McFarland. No, I don't believe that they have the same
program that we do.
Ms. Norton. I am sure they don't, but I am saying they buy
as a single customer. I am asking that, for those who
subscribe, is there one plan and only one plan for DOD and for
VA?
Mr. McFarland. Well, I think the DOD and the VA have
different approaches to their prescription drugs than what we
are talking about for the FEHBP.
Ms. Norton. Mr. Chairman, I realize my time is up, but I do
need to know whether or not----
Mr. Lynch. I will give you another 2 minutes.
Ms. Norton. Thank you.
I do need to know if veterans, if the largest part of the
bureaucracy, the DOD, maybe they are so different that they
really are apples and oranges. If so, I would like you to
explain.
Mr. McFarland. Well, the DOD and the VA, they each have
their separate plans.
Ms. Norton. I understand. Staff says--is it VA that has
three or four plans?
Mr. McFarland. They have regional plans, like four
regional.
Ms. Norton. What I am trying to find out, if they have
multiple plans, is--and perhaps this information could be
transmitted to the chairman. I am wondering how they do
transparency, how they assure.
Mr. McFarland. Well, I am not sure at all that they are
able to identify transparency.
Ms. Norton. Well, then, I would ask you to find out. That
is to say I am very bothered by the fact that such a large
percentage of the prescription drug dollar is, in fact, in
another section of the Federal Government. I simply want to
know if there is something we can learn from them or if we are
reinventing the wheel here. And, if so, then that has to be the
case.
Mr. O'Brien.
Mr. O'Brien. Congresswoman Norton, thank you. Again, urged
on by this committee, OPM staff has, in fact, met with DOD and
the individuals who run the Tri Care program to try and learn
about how their pharmacy program works. It is much more of a
single contract for pharmacy benefits that they run nationwide
with separate regional sub-contracts. Again, we are actively
studying it, and we have had some very good feedback from the
Tri Care folks, and it is a very interesting model that we are
learning a lot more about.
Ms. Norton. And you think that some of that model may be
transferrable to some of what you are trying to do today?
Mr. O'Brien. Again, we are actively studying that, as well
as the other options that were offered by this committee in its
forum in September. We haven't completed our analysis, but we
are actively looking at it, and when we have completed it we
look forward to working with you more on those issues.
Ms. Norton. Thank you, Mr. Chairman.
Mr. O'Brien. But thank you, Tri Care is a very useful model
for us to look at.
Ms. Norton. I thank you, and I thank you, Mr. Chairman, for
the additional time, because it is becoming more and more
difficult, given the scarcity of Federal dollars, for us to
rationalize different treatment of large sections of the
Federal budget for essentially the same purpose.
Thank you, Mr. Chairman.
Mr. Lynch. I thank you.
I yield to myself 5 minutes.
Mr. O'Brien, part of your testimony is more than a little
disappointing, I think, for us in that previous testimony from
OPM has been of a similar vein. At one point one of the
witnesses from OPM said that ``transparency is over-rated.''
That is a tough thing for an oversight committee to hear.
We are intensely interested in getting to the bottom of
what costs actually are for our health care system, and I know
that you came out with a very positive carrier letter
yesterday, though, in advance of this hearing. Sometimes I feel
like I am pulling you folks along toward the road of reform,
and I just wish we were working more closely together trying to
get to the same object, and that troubles me somewhat, and I am
concerned that the agency has become captive to the current
system and is resistant to change.
As you heard Mr. McFarland say, the most troubling aspect
of the current FEHBP program is the utter lack of transparency,
how it is so opaque and so complex. We are not mapping the
genome here. We are selling pharmaceuticals to Federal
employees. In my other capacity on the Financial Services
Committee, I am dealing with complex derivatives, currency to
fall swaps, credit to fall swaps, financial engineering that is
increasingly and incredibly complex. It pales in comparison to
what we have going on here in selling pharmaceuticals to
Federal employees.
That is all we are doing here, and we have this construct
that is just mind boggling and mind numbing. I think that is
exactly why it was constructed the way it is, to resist change.
It resists the threat of being understood by its complexity. We
are trying to drill down and straighten this up. We need your
help. We really do.
This current system, we have just got to blow it up and get
rid of it and get on to something else, because this is not
working for the American taxpayer. I think the estimate that
Ms. Weaver has put out there of several hundred millions of
dollars in savings, that is probably conservative, what I see
here.
I think it is probably closer to $1 billion what we can
save. In light of the difference in formularies that we pointed
out here this morning, what we are paying, we have 8 million
participants and we don't use that collective clout, that
buying power, at all in our systems, and we allow these PBMs to
really abuse what I think is honorable service by our Federal
employees. We are just letting them take advantage of us, and
we cannot do that any more. Our budget will not allow it. So we
have to find some savings, and if we are looking for waste,
fraud, and abuse, the FEHBP is a target-rich environment
because of the arrangements that we have going on here.
This stinks. If I was a hound dog, I would be pointing
right here. Here is where some savings are. Here is where some
waste, fraud, and abuse is going on and I know it, and we are
trying to dig down and get at it.
We can save the taxpayer a ton of money. We could bring a
more competitive model and better serve. We have wonderful
Federal employees. I am an advocate for Federal employees. They
do wonderful work. They provide a valuable public service. We
cannot let this go on. This is just unacceptable. We can't do
this any more.
So I am really looking for your help. I know we have a new
Director over there, Mr. Berry, who is on the right. He is part
of the solution. He is not part of the problem, he is part of
the solution. But we have some inertia over there. Inertia, at
best, and then resistance, at worst, and we have to get at it.
Since I am the chairman and there are no other witnesses, I
am going to extend myself another 5 minutes.
Let me ask you, Mr. Boehm, you have been terrific on this
and you have a unique perspective. In terms of transparency,
you addressed this in part in your original testimony about the
concern that has been raised by the PBMs that if people know
what they are paying for then prices will go up and it will
destroy competition, but can you talk a bit more about your own
experience, and also about some of the protections in the bill
so that this is not publicly available information that would
undermine their competitive advantage?
Mr. Boehm. The argument, as I understand it, they put forth
is that if the information is publicly available that the
competitors, the manufacturers, and the other chains would
actually increase their prices because they would have more
information available. It is a difficult argument to debate
because it is not publicly available now. In many other
industries I think we have seen transparency lowers costs, not
raise it.
But rather than debate that particular topic, I think the
most important thing is you have provisions in your bill that
make it only available for OPM's use. It is not posted on Web
sites, so the manufacturers can't see what the deals are, so I
don't think there is any risk in the way you have constructed
your confidentiality that it would be publicly available
information.
And then I would question, even if it was publicly
available, whether that really would increase costs, because,
again, I think you can go through a number of retail markets.
You can look at computers on the Internet. You can look at cars
as more transparent pricing information has been made
available. Costs generally go down in those environments. But
rather than debate the economic principle, I think you can just
protect them against the disclosure of the information.
Mr. Lynch. OK. Mr. Beck, you mentioned that your experience
in Texas, $260 million in 4 years. We have 8 million
participants. What is the size of the market there?
Mr. Beck. Mr. Chairman, I am not real sure. I know it is
extremely large. I think that estimate is low. I agree with
you. I think that the estimate is a little short at half a
billion. I think it is over a billion.
Mr. Lynch. Yes.
Mr. Beck. One thing I wanted to mention. Back in 2002 there
was a lawsuit brought by the FEHBP and I believe the mail
carriers, I was reviewing it this morning, against Advance PCS,
which is----
Mr. Lynch. Was that Mail Handlers?
Mr. Beck. Mail Handlers. Yes, sir.
Mr. Lynch. OK.
Mr. Beck. Advance PCS, which is now no longer. It was
bought by CVS Caremark. And out of that was $179 million
settlement. In addition to that, there were provisions in the
settlement that was a 5-year requirement for transparency
standards to be followed. That has now expired. So basically,
your legislation just extends that Federal lawsuit settlement
and puts it in legislation that has to do with all PBM
contracts.
Mr. Lynch. Yes. Thank you.
Ms. Weaver, I think you mentioned some of this in your
testimony about drug switching and the abuses. You laid out
that very cogent analysis between what folks were paying for
that formulary, the $9.99 comparison. Can you drill down that a
little bit and elaborate on that analysis that you came up
with?
Ms. Weaver. Absolutely. So essentially, what we did is we
took CVS's generic discount program, which is a list of over
300 drugs that they offer for $9.99. As everybody said today,
it is very hard to figure out what drugs cost, right, so you
need a baseline to figure out if you are getting a good deal.
So one of the reasons we decided to look at this is this is a
baseline. It is the walk-up price. You pay $10 to join this
program, and anybody can get access to 300-plus generic drugs
for $9.99.
So what we wanted to do was look at Blue Cross/Blue
Shield's FEP program. It is the largest plan within the FEHBP.
We can compare the prices that the Government and those Federal
employees are paying for every single one. We tested every drug
on that list. What we found, as I mentioned, was that 85
percent of the drugs on the list cost the Federal Government or
Federal employees--and/or, sometimes both. It depends on the
cost structures--more than that $9.99 price. So it was a little
bit----
Mr. Lynch. So the people with insurance are paying more
than the people without insurance?
Ms. Weaver. Exactly, for 85 percent of the drugs on the
list.
Mr. Lynch. How wacky is that?
Ms. Weaver. It is pretty wacky.
Mr. Lynch. Yes. Unbelievable.
Ms. Weaver. And we have heard from Federal employees that
actually don't use their insurance when they go into a retail
store because they know that they can get a better deal. That
is pretty absurd, as well, because those people are paying
premiums that are supposed to give them prescription drug
coverage.
Mr. Lynch. Right. They are paying premiums.
Ms. Weaver. It is really sad.
Mr. Lynch. And the American taxpayer is paying 72 percent
of that plan, in addition to what the user is paying. So that
is what has me absolutely furious over what is going on here.
Mr. McFarland, I appreciate your work on this. This has
been tough, and you have expressed at earlier hearings your
frustration in being able to determine what we are getting for
our money and whether there is an advantage here being had by
the Federal Employees Health Benefits Plan and its 8 million
participants in our arrangement with these PBMs. Is there
anything that is not in the bill that you think might help your
position in terms of understanding what is going on behind the
scenes and the real cost between all these relationships, the
commissions, the rebates, and that whole relationship between
manufacturers and PBMs and pharmacies, as well?
Mr. McFarland. No, Mr. Chairman. I don't think that there
is anything in particular that should be additionally placed in
the bill. I think it is very complete as it is. That doesn't
mean that there might not be, after further deliberation, some
more thinking about add-ons. But at this point I wouldn't say
anything specific. What we are dealing with, I think, your bill
clearly covers.
If I can, let me make a point on something that was
presented to me earlier today when we were discussing, as we
have been for a few weeks, preparing for the testimony today.
Mr. Lynch. Please.
Mr. McFarland. This is just a little excerpt from the audit
staff, what they noticed after the large provider agreement was
brought into effect, I think in 2005, and that simply meant to
us that we were able then to get into those PBM contracts. But
as it turned out, it was only in a compliance mode. We still
could not get to where we needed to be with that large provider
requirement. And my understanding of large provider agreement
was simply whoever ends up paying at least 5 percent, then they
would consider large provider. Of course, the prescription
drugs, 25 or more percent. So that was an easy identification
there.
But here is what was given to me. This is from the audit
staff. We have noticed a distinct shift in how the PBMs have
contracted with FEHBP carriers. What we saw as pass-through
pricing initially with administrative fees and rebates
returned, did a complete 180 degrees. After the large provider
agreement, the contracts became based on a percentage off of
the average wholesale price for the drugs, with no
administrative fees charged and the PBM keeping most, if not
all, of the rebates.
Because the drugs are priced off a percentage of AWP, our
audits consisted of verifying the price charged to the FEHBP;
however, we could not compare that price to the actual price
paid by the PBM.
Mr. Lynch. Right.
Mr. McFarland. So it was just obvious----
Mr. Lynch. Yes. I understand what they are doing there. The
average wholesale price is a moving target. It means something
different to everybody, so you don't have a solid benchmark
there by which you can make that determination.
What we are actually looking for here is the actual price.
Mr. McFarland. Yes.
Mr. Lynch. How much the actual cost is and how much we are
being charged. That is all we want to know. We just want a fair
deal. That is all. And one we can understand on behalf of the
people that we represent, and we can't get there with the way
this thing is working right now.
Mr. McFarland. Well, we presently receive confidential
proprietary information from the PBMs as a data base on
prescription claims, and we protect that with our heart and
soul.
Mr. Lynch. Yes.
Mr. McFarland. We make sure that is as safe as possible in
our particular environs. But then, on the other hand, they are
saying, ``But you don't need to see our financial records, but
we can give you the personal identification information of our
claims people.'' So it is saying one thing and doing another.
Mr. Lynch. That is right. That is exactly right. Some of
the information that is being sold out there and marketed is
quite detailed, so it is counter-intuitive that they can't give
it to you in a form that you can use.
All right. I think you people have suffered enough. I want
to thank you on behalf of the committee. We have a lot going on
here today. As you know, there are a few major hearings going
on here. I want to thank you for coming before this committee
and helping us with our work. I would like the opportunity to
continue to work with you.
Look, I am not saying that our legislation is perfect. Not
by any means. That is why we are having this hearing and that
is why we are trying to get input from you. I think actually
you have all been helpful in making this legislation better. We
appreciate your testimony and your help with this. We are going
to allow Members who may have had questions to offer you
inquiries that you will, if you are willing, would have to have
you respond in writing within 5 days if Members so choose. But
other than that, I want to thank you for your attendance today
and you are free to go. Thank you.
Can we ask our third panel to come up?
Good afternoon. I am sorry if we have delayed you with the
length of the previous panels. I do appreciate your attendance
here.
It is the custom of this committee to swear all witnesses
who are to offer testimony, so could I please ask you all to
rise and raise your right hands?
[Witnesses sworn.]
Mr. Lynch. Let the record indicate that all of the
witnesses each has answered in the affirmative.
As with the previous panel, we will offer a brief
introduction before we ask witnesses to offer testimony.
Mr. Daniel Adcock is currently legislative director of the
National Active and Retired Federal Employees Association.
Before going outstanding that Association, Mr. Adcock worked
for the House Committee on Education and Labor's Subcommittee
on Employment Opportunities and its Subcommittee on Human
Resources and was an Executive Assistant to the Assistant
Secretary for Aging, Jeanette Takamura.
Dr. Jacqueline Simon is the public policy director for the
American Federation of Government Employees [AFGE]. AFGE
watches over the rights of some 600,000 Federal and D.C.
Government employees. An economist by training, Ms. Simon has
worked to protect the interest of Federal employees at AFGE for
over 20 years.
Ms. Colleen Kelley is the president of the National
Treasury Employees Union, the Nation's largest independent
Federal sector union, representing employees in 31 different
Government agencies. President Kelley, a former IRS revenue
agent, was first elected to the union's top post in 1999.
I do want to add my condolences and that of the committee.
We understand, Ms. Kelley, the incident last week where your
colleagues' offices were attacked in Austin, TX. I am aware
that your organization suffered a loss of Vernon Hunter, a
Social Security Administration Manager who was killed in that
attack in Austin, so our prayers are with your members and
especially the Hunter family. I understand they had six kids,
and I know that Mr. Hunter's wife also is an IRS employee, as
well.
Ms. Kelley. Yes.
Mr. Lynch. That makes it even more difficult, but we do
offer our condolences in that respect and we appreciate the
fact that you were down there helping with those employees. I
know we had quit a few injured, as well.
Mr. John E. Calfee is a resident scholar at the American
Enterprise Institute for Public Policy Research who studies the
pharmaceutical industry and the Food and Drug Administration.
He previously worked at the Federal Trade Commission Bureau of
Economics, and has also taught marketing and consumer behavior
at the Business Schools of the University of Maryland at
College Park and Boston University.
Mr. Larry McNeely is a U.S. Public Interest Group's health
care advocate, advocating the organization's Federal level
advocacy, communication, and organizing on health care reform.
Mr. McNeely lobbies Congress for legislation that will tame
rising health care costs and offer consumers better choices in
the health care marketplace.
As was indicated earlier, the little box there in front of
you will be green when you should be speaking, yellow when you
should think about wrapping up, and red when you should stop
offering testimony.
Mr. Daniel Adcock, you are now recognized for 5 minutes.
STATEMENTS OF DANIEL ADCOCK, LEGISLATIVE DIRECTOR, NATIONAL
ACTIVE AND RETIRED FEDERAL EMPLOYEES; JACQUELINE SIMON, PUBLIC
POLICY DIRECTOR, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES;
COLLEEN KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES
UNION; JOHN CALFEE, RESIDENT SCHOLAR, AMERICAN ENTERPRISE
INSTITUTE; AND LARRY MCNEELY II, HEALTH CARE ADVOCATE U.S. PIRG
STATEMENT OF DANIEL ADCOCK
Mr. Adcock. Chairman Lynch, I appreciate the opportunity to
testify. I am Daniel Adcock, legislative director of the
National Active and Retired Federal Employees Association.
Two important issues to our membership are access to the
latest in pharmaceutocology technology and ways to manage the
costs associated with life-saving and life-enhancing drugs.
Under the expected technological revolution in medicines,
diseases that were once fatal or debilitating will become
chronic and manageable. Ailments once requiring surgeries or
stays in hospitals or nursing homes will be treated by
pharmacology at home.
Due to advances in human genomics, our medicines will now
be tailored to our own DNA. This means drugs will be more
likely to treat our ailments while mitigating side effects and
drug interactions.
Many women suffering from breast cancer had been prescribed
tamoxifin have already been the beneficiary of this new age of
medicine. This is only the beginning.
The medicine bottle cap may be able to tell your cell phone
or home computer where you mislaid the bottle or alert you if a
child or other unauthorized person has opened it. Your doctor's
office or family member may be able to know if the bottle was
opened and your daily dose removed.
Then there is the pill, itself. Embedded in the very tablet
there is likely to be a computer chip to remind you or someone
else that you took the medicine and the correct dosage and
whether it was metabolized correctly.
The role the PBM will play in this evolutionary change will
only become more critical in providing access to cutting-edge
drugs while containing costs. Transparency and oversight will
become even more important. We can accept the cost of advanced
drugs as long as we can be assured that they are safe and
effective and that the process of pricing such drugs is fair.
That is why NARFE is particularly interested in guaranteeing
that the savings achieved by PBMs are passed on to enrollees.
We are pleased that H.R. 4489 tackles this issue.
We are heartened to see that the President's budget
emphasizes and continues the responsibility of OPM's Inspector
General in auditing reprimand benefits and the role of PBMs.
Hopefully, this will improve the contract negotiation process,
hold costs in check, and ensure against fraudulent claims.
For the 2010 FEHBP contract year, OPM has now requested
more information from carriers as they contract with PBMs for
their services. Let us hope this brings further information to
OPM and the beneficiaries.
Drug pricing is very complex. With the processes that
involve the drug formulary and the choices between generics and
brand names, plus the costs associated with disease management
and patient information. Although drug formularies can help to
contain costs, they can also prevent patients from getting the
most efficacious medication. For that reason we are glad that
H.R. 4489 gives physicians the final say on which drugs should
be dispensed.
Still, OPM is not alone in seeking greater transparency. In
fact, human resource professionals outside Government are
developing transparency standards to ensure the PBMs are
sharing manufacturer rebates and negotiating the lowest
possible cost of specific drugs. This experience could be
helpful to OPM.
It appears that some of what has been proposed in H.R. 4489
could be implemented under OPM's regulatory authority. For that
reason, OPM could get a jump start on enhancing its oversight
of PBMs before H.R. 4489 becomes law and codifies the
additional authority that would be provided to the agency.
Still, we strongly believe that nothing should be left to
chance regarding OPM's ability to access PBM information. For
that reason, we believe that transparency should ultimately be
legislated.
As we continue to work with you on this important
legislation, NARFE would be interested in information from OPM
or the Congressional Budget Office on cost savings, formulary
development, and administrative costs that might arise from
such regulatory or legislative initiatives. Beyond H.R. 4489 we
believe that the FEHBP plan should buy prescription drugs for
enrollees at the discount mandated by the Federal supply
schedule. However, if the FSS were to be used, FEHBP plans must
have the option of buying off-formulary medications.
NARFE would also support your proposal to designate FEHBP
PBMs as subcontractors under Federal acquisition rules.
We commend you for your interest in fair prescription drug
pricing in the FEHBP, and we look forward to working with you
on this issue. Your prescription for the future of our health
insurance program is a welcome addition, and we thank you for
your effort.
[The prepared statement of Mr. Adcock follows:]
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Mr. Lynch. Thank you, Mr. Adcock.
Dr. Simon, you are now recognized for 5 minutes.
STATEMENT OF JACQUELINE SIMON
Ms. Simon. Chairman Lynch, thank you very much for the
opportunity to testify today.
Focusing on the operations of pharmacy benefit managers is
an excellent place to begin improving the affordability of
FEHBP, since the costs they impose are a big cause of the
program is continuously rising prices and its lack of
affordability for so many of our members.
Although AFGE strongly supports H.R. 4489, I would like to
focus my statement today on one provision of the bill that, if
altered slightly, could have a significant impact on the cost
of FEHBP. Specifically, that provision involves limiting the
prices that PBMs can charge to FEHBP carriers. The maximum
price for prescription drugs in the bill it says would be an
amount that is equal to the average manufacture price for the
drug as disclosed by the manufacturer. However, given the size
of FEHBP, AFGE believes that the Government and plan
participants should receive the full advantages of their
purchasing power, and that means a better bargain than average
prices.
The PBMs may be currently charging FEHBP higher than
average prices for drugs is unconscionable. AFGE supports a
much stronger pricing standard than that which is set forth in
the proposed legislation. We would recommend limiting these
prices to the amounts provided for in the prescription drug
price schedules used by the Department of Veterans Affairs
[DVA]. Alternatively, the legislation could limit the maximum
reimbursement to a ``most favored customer'' pricing model.
Technically, the General Services Administration [GSA],
delegates authority to negotiate these prices and has done so
for DVA. There is no reason why the same authority could not be
extended to OPM with regard to FEHBP, but it would be far more
efficient for OPM to simply use the VA prescription drug
pricing schedule.
We have heard the arguments from the organized
pharmaceutical industry that extending statutory pricing
schedules to additional Federal health care programs will
result in higher prices for all Government purchasers. They
seem confident that no one can or will expect pharmaceutical
companies to accept lower aggregate profits.
AFGE believes that we should all call their bluff. Even if
the drug companies do succeed in raising prices for all Federal
purchasers as the price of selling to all Federal programs at a
uniform price, it is likely that the Government will still save
money. FEHBP is large enough that a substantial decrease in its
drug prices could offset retaliatory price increases that the
drug companies might try to impose.
A final concern involves pricing transparency, which has
been discussed a lot here today. AFGE believes that in order
for the legislation to have meaningful price transparency, the
requirements of TINA, the Truth in Negotiations Act, should be
applied to the program. Both FEHBP carriers and PBMs utilized
by the carrier should be required to make available to
Government agencies all cost and pricing data relating to the
purchase or reimbursement of prescription drugs by these
entities. They provide it to other Federal agencies in other
contracting situations, and there is no reason they shouldn't
be required to provide that same data in this context.
In addition, AFGE believes that the application of cost
accounting standards should specifically be applied to the
FEHBP carriers and PBMs in order to ensure that accounting for
the pricing and reimbursement of prescription drug costs is
performed in a uniform and consistent manner.
The President's fiscal year 2011 budget proposal indicates
that OPM's Office of the Inspector General intends to develop
its ability to audit PBMs. The budget cites OPM estimates that
prescription drugs make up 26 percent of FEHBP's costs and will
total $11 billion next year. The benefits of more thorough
auditing should be substantial.
Requiring FEHBP carriers and the PBMs to adhere to the cost
accounting standards will give the OPM IG the tools it needs to
carry out these audits in a way most advantageous to taxpayers
and enrollees.
This concludes my testimony, and I would be happy to answer
any questions you may have.
[The prepared statement of Ms. Simon follows:]
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Mr. Lynch. Thank you, Dr. Simon.
President Kelley, you are now recognized for 5 minutes.
STATEMENT OF COLLEEN KELLEY
Ms. Kelley. Thank you very much, Chairman Lynch.
I am here on behalf of NTEU members who participate in
FEHBP and diligently pay their ever-rising premiums for health
insurance only to receive reduced coverage and higher co-pays
and coinsurance costs for their prescription drugs. We were
very pleased to participate in the subcommittee's drug pricing
forum last September that aptly highlighted the incongruity in
FEHBP, a program with one of the largest enrollee pools of 8
million people, as we have heard, yet one that gets the worst
prescription drug prices in Government.
H.R. 4489 takes a giant step forward in addressing the
problems of why OPM has been unable thus far to better leverage
what should be a significant advantage. According to OPM's
Inspector General, as we have heard, the cost structures of the
pharmacy benefit managers in FEHBP are utterly non-transparent.
Because the contracts cannot be audited properly under the
current system, OPM does not have all of the information it
needs to make any substantive improvements. Common sense
dictates that U.S. taxpayers, and especially FEHBP enrollees,
who saw their premiums rise roughly by 9 percent this year or
15 percent if they were a single enrollee in the popular Blue
Cross/Blue Shield standard plan, deserve better than that.
H.R. 4489 says if a PBM and carrier want to participate in
FEHBP, certain conditions need to be met. NTEU supports this
approach and the accompanying goals of transparency and
accountability.
A tentative transparency and accountability is increased
disclosure. Just as the administration calls for greater
disclosure in Government through information and data sharing
by Federal agencies and individuals, it is only fitting for
these billion dollar private companies who make a profit from
Government business to become more transparent through
disclosing relevant information, as well. If PBMs want to
participate in FEHBP, they should be held accountable, as H.R.
4489 proposes to do.
Therefore, NTEU supports section 2(H) of the bill, which
would allow OPM to access information on arrangements that PBMs
have with manufacturers and pharmacies. The range of
information that OPM would have available through these kinds
of disclosures would include corporate-wide rebate reports,
rebate allocation methodology, benchmark pricing, and various
fees at different stages. These will all put the agency in a
position to better do its job. We are not advocating public
dissemination of proprietary information, but we are advocating
disclosure to OPM as needed so it can monitor the Federal
program.
We also support the bill's approach to prescription drug
rebates in section 2(C) and believe the language could be
clarified even further to improve FEHBP. PBMs were originally
intended to handle administrative functions associated with
drug claims; now PBMs negotiate for discounted drug rates and
receive hidden payments and rebates from manufacturers, as well
as other fees and payments from carriers.
Under section 2(C), with 99 percent of rebates and fees
being returned to the insurance carriers, NTEU would also
recommend additional clarifying language to ensure that the
funds recaptured will be dedicated to the FEHBP program and be
used to keep enrollee costs down, as we understand, DOD's Tri
Care health plan does. Under Tri Care, rebates are put back
into the insurance program and the PBM receives an
administrative fee for services.
NTEU also believes the consumers protections in H.R. 4489
are a very positive step, the ones on drug switching and on
selling claims data and on timely explanation of benefits. The
PBM does not know what is best for patients, so the drug
switching issues should go away, and the only way that should
be able to occur is with appropriate medical input. We support
an end to that practice.
Now, on selling claims, while we question the practice of
selling FEHBP claims data at all, at a minimum OPM's
concurrence should be a part of that process.
On EOBs, FEHBP enrollees will benefit from this added
disclosure of prescription drug costs, enhancing their ability
to choose the best plans for their needs.
Finally, NTEU would support adding language to H.R. 4489 to
provide a pilot test of statutory pricing. We have long
believed that OPM should investigate the possibility of buying
prescription drugs off of the Federal supply schedule, as we
have heard that the VA and Defense do. Their drug prices are
substantially lower than FEHBP. Ten years ago I testified
before Congress in favor of a small pilot that OPM had approved
for the SAMBA health care plan to allow access to the Federal
supply schedule for its mail order drug program. SAMBA argued
it could save 3 percent annually in enrollees' premium shares
by directly buying from the Government. Overall savings would
have been $2.4 million annually, and that was back in 2000
dollars.
Despite OPM's approval, the pharmaceutical industry, whose
profits 12 years ago were estimated at $26 billion, pulled out
and they refused to participate in the plan. NTEU would support
a demonstration project to examine hard numbers associated with
the direct purchase of drugs through the FSS and we would
support adding a provision to H.R. 4489 to make that happen. I
believe this approach offers a real opportunity for cost
savings.
I thank you for the opportunity to testify today and will
be glad to answer any questions.
[The prepared statement of Ms. Kelley follows:]
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Mr. Lynch. Thank you.
Mr. Calfee, you are now recognized for 5 minutes.
STATEMENT OF JOHN CALFEE
Mr. Calfee. Thank you, Mr. Chairman. It is a privilege to
speak at these hearings. The views I present are my own, not
those of any organization, including the American Enterprise
Institute, which does not take institutional positions on
specific legislation, litigation, or regulatory proceedings.
H.R. 4489 focuses on the role of pharmacy benefit managers
[PBMs], as we have heard, in Federal Employees Health Benefits
Plans. On the whole, the provisions of H.R. 4489 would do far
more harm than good for consumers and patients, and it would
increase health care costs.
This bill is based on the assumption that competition does
not work well in the PBM market. The facts belie this premise.
Competition is vigorous and multi-faceted. Stand-alone PBMs
compete among themselves and also compete with retail
pharmacies, large health insurance plans, large employers, and
even pharmaceutical manufacturers, themselves.
In this highly competitive environment, employers and
insurance plans have negotiated a rich variety of PBM contracts
that reflect the specific preferences of the contracting
parties.
Another indicator of vigorous competition is the fact that
a detailed investigation by the FTC, the Federal Trade
Commission, found very little evidence of favoritism or self
dealing on the parts of PBMs, regardless of who owned the PBMs.
H.R. 4489 would force nearly complete transparency in the
financial arrangements between PBMs and their partners. This
would be difficult to achieve. But if the legislation does
bring this kind of transparency, it would undermine the
incentives of PBMs to negotiate discounts from pharmaceutical
manufacturers. This has been recognized by the FTC staff and by
other economists.
H.R. 4489 would also require PBMs to pass on virtually all
the savings they realize from aggressive cost cutting. This
would undermine the incentives to cut costs in the first place.
This cost cutting comes primarily from negotiating rebates from
pharmaceutical manufacturers. Undermining these incentives
would raise cost. This adverse consequence of regulation has
also been recognized by FTC economists and by others.
H.R. 4489 would also establish price controls, which
rarely, if ever, does good in competitive markets. The
prohibition on negotiating a spread between payments to
manufacturers and to pharmacies would discourage PBMs from
seeking to reduce drug prices and costs. Giving OPM the power
to set ceilings on pharmacy dispensing fees would require OPM
to uncover the true costs and benefits of dispensing for
pharmacies. This is not easily done, and it could easily
disrupt access or even increase costs.
H.R. 4489 would prohibit health plans from reimbursing more
than what is called the average manufacturer price [APM], and
OPM would be granted new oversight powers on drug pricing.
There is no reason to think this would reduce price directly,
and prices directly, because manufacturers can adjust prices
outside of the FEHBP system, but this measure could easily set
the stage for direct price controls over pharmaceuticals, as we
have already heard. This would have extremely adverse
consequences for researching and developing new drugs and new
uses for approved drugs.
H.R. 4489 would also impose restrictions on who can own a
PBM. This would tend to reduce competition. In addition, these
restrictions would deprive the marketplace of the benefits of
vertical integration. For example, ownership restrictions would
sometimes add extra steps in the pricing of drugs as they
proceed through various channels from manufacturers to
patients.
H.R. 4489 would also expand regulation of drug formularies.
Little, if any, evidence indicates that PBMs harm patients
through the design and operation of formularies. New
restrictions are more likely to raise costs than to improve
health.
Finally, H.R. 4489 would grant OPM the power to prevent PBM
from selling information on drug utilization and sales. This
would be unfortunate. This kind of information can play an
important role in the larger task of improving pharmaceutical
targeting and use. And, again, there is little, if any,
evidence of consumer harm from these practices.
For all these reasons, I respectfully urge this committee
to reconsider H.R. 4489. There is no reason to prevent
employers, health plans, and pharmaceuticals from negotiating
whatever arrangements they wish with PBMs.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Calfee follows:]
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Mr. Lynch. Mr. McNeely, you are now recognized for 5
minutes.
STATEMENT OF LARRY MCNEELY II
Mr. McNeely. Thank you, Mr. Chairman.
Mr. Chairman, members of the committee, I very much
appreciate the opportunity to come before you today and testify
about this bill and its effort to control the cost of drugs in
the Federal Employees Health Benefits Program.
As I said, my name is Larry McNeely. I am the health care
advocate with the U.S. Public Interest Research Group. U.S.
PIRG, as we call it, is a national federation of State-based
consumer advocacy organizations. We have a 35-year history of
standing up for consumers, and we are convinced that both
strong competition and strong consumer protection are essential
to the functioning of any market. Unfortunately, the pathway
for pharmaceutical delivery in this country, the market for
pharmaceutical benefit managers [PBMs], lacks that adequate
competition and it lacks the consumer protections that are
required, and that is why the reforms envisioned in H.R. 4489
are so necessary to help bring down costs.
In explaining the benefits of transparency, I think a lot
has been said in this panel and in previous panels. I just want
to refer to the comments of assistant attorney general for
Antitrust, Christine Varney, who highlighted its importance
when she said: I am a firm believer in what Justice Brandeis
said in another context: Sunlight is said to be the best of
disinfectants; electric light the most efficient policeman.
Markets work better and attempted harms to consumers are more
likely to be thwarted when there is increased transparency to
consumers and Government about what is going on in an industry.
I could not say it better.
In my written testimony I go into more detail, but, just to
outline a couple of the essential points, if the three
essential elements of any competitive marketplace are choice,
transparency, and a lack of conflict of interest, the PBM
market actually lacks each one of those three. It is highly
concentrated. We actually have some evidence which I detail in
here of legal action to stop deceptive and fraudulent
practices. And we continue to see these practices of drug
switching and self-dealing, which are not only unfair to
Federal employees in this particular context, but are spread
more broadly across the health care market and we really think
needs addressing in other legislation.
We believe enacting H.R. 4489 will lead to significant cost
savings for taxpayers. The proposed legislation will actually
lead to a reduction in pharmaceutical costs by requiring the
pass-through of rebates and prohibiting the practices of drug
switching and spread pricing, and it will protect employees and
taxpayers by preventing conflicts of interest that we have run
into in cases like CVS Caremark, where a PBM is owned by a
retail chain.
These assertions are backed up by a growing body of
evidence that demonstrates that plan transparency does allow
plan sponsors to monitor and curb their prescription drug
spending. I detail a number of examples, but in one case in New
Jersey when they switched to a pharmaceutical benefit manager
contract that was transparent for 600,000 covered employees,
they are now projected to find $558.9 million in savings over 6
years. If we are talking about 8 million Federal employees,
certainly a substantial amount of resources are available.
And just to sum up, I think our attitude and why we are, I
think, so grateful to the sponsors of this legislation for
moving it forward is that without the protection afforded in
H.R. 4489 it is as if the pharmaceutical benefit management
industry is saying to taxpayers, saying to Federal employees,
give us $10 billion of your money and trust us. The PBM
industry, as a whole, as we have demonstrated in some of the
lawsuits I detail in my testimony, has not earned that trust,
and we should make sure--I hope this legislation gets favorable
consideration by the committee.
Thank you.
[The prepared statement of Mr. McNeely follows:]
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Mr. Lynch. Thank you, Mr. McNeely.
I now yield myself 5 minutes.
I want to thank you all for your testimony. I really
appreciate your willingness to come before the committee.
Mr. Calfee, I have great respect for the American
Enterprise Institute. They have long been advocates of good
Government, I think. I am a little puzzled. I know that you
testified previously before the House Energy and Commerce
Committee to the effect that prescription drugs in the Medicaid
program should more closely reflect cost.
Now, here in today's hearing, you have heard both
Republican and Democratic Members express the frustration that
we cannot determine what the costs are of the drugs in the
FEHBP program. We have heard from the customers, the users,
that they cannot determine what the costs are of the drugs
offered in the FEHBP program. We have heard from the Office of
Personnel Management responsible for oversight of the FEHBP
program, that they, indeed, cannot determine what the costs are
of the drugs in the FEHBP program.
We have heard from the Inspector General of OPM who says--
and he is principally responsible for the oversight here--that
he cannot determine what the costs are in the drugs for the
FEHBP program, and we even have an example of a program where
300 drugs are offered to the general public with no insurance,
with no insurance, and they are paying less money than insured
individuals are paying through their pharmacy benefit managers
in the FEHBP program, which is funded on an average 72 percent
by the taxpayer, roughly 28 percent by premiums paid for by the
individual.
Why would you support the principle that Medicaid drugs
should be as closely as possible priced based on cost, and yet
your testimony here today seems to be at variance with that, if
not directly opposed to it.
Mr. Calfee. You are referring to my own testimony in
connection with Medicaid?
Mr. Lynch. Yes.
Mr. Calfee. I am trying to remember what I said, but I
imagine what I said was that Medicaid should pay market prices
rather than getting a special fixed discount from market
prices. But they should go out in the market.
Mr. Lynch. You testified in 2005 before the House Energy
Commerce Committee that says closely reflect cost.
Mr. Calfee. By cost I was referring to market prices.
Certainly I was not referring to the cost of manufacturing the
drugs, because those costs are very, very small compared to any
prices.
But my understanding, especially from the testimony of Mr.
O'Brien earlier today, is that all of these plans are free to
reach contracts with PBMs that do provide for disclosure. In
fact, I believe that is what Argus Systems specializes in. And
so my understanding is if a plan wants to have transparency, if
they want to have the rebates passed through to them, they can
arrange for that through contracts.
So I think the issue here is whether or not they have their
freedom to either have a contract that does provide for
transparency and pass-through rebates or to have a contract
that doesn't do that. And what we have heard in the private
sector outside of FEHBP is you get both kinds of contracts. You
get contracts with transparency, ones without, etc. The plans
experiment with different ones. Sometimes they save money from
when they switch from one approach to another, and sometimes
they don't.
Mr. Lynch. But, sir, in this case we are the customer. I am
a Federal employee. I am an oversight officer on behalf of the
Federal employees. It is not as if we said we want a contract
with no transparency. We are demanding transparency and we
can't get it, nor can the Office of the Inspector General. We
can't get that transparency. Nor can the Office of Personnel
Management. We can't get that. The PBMs and the contracting
parties are saying that it is a matter of proprietary advantage
and they don't want to disclose that.
So we have had instances where it has gone to court, in the
State of Maine example, where I think the heat of that
litigation broke the case open for the State of Maine, and that
was a great advantage. But absent that urgency and the consent
decree that was rendered in that case, that transparency would
not be forthcoming.
So it is not like, oh, we'd prefer transparency or we would
not prefer transparency; we are demanding it and we cannot get
it. That is the truth of the matter here on behalf of everyone
that I mentioned, Republican and Democrat, so far.
Mr. Calfee. Again, I know in the private sector outside of
FEHBP it is fairly common. It is not the rule, but it is fairly
common. It does happen that a plan will have a contract for
transparency, such as with Argus Systems that we heard about
earlier.
But if you think about negotiating, a PBM negotiating with
a drug manufacturer, if it wants to get a discount on a certain
drug, and if that manufacturer knows that any discount he
provides will instantly be communicated through the plans to
other drug manufacturers and the other manufacturer will
probably offer to match that price, then what the manufacturer
knows during the negotiating process is there really isn't much
to be gained by the manufacturer by providing a discount
because they will end up having to give that discount to
everyone.
So I think economic reasoning does suggest that if you
force transparency you can make these negotiations more
difficult, discounting more difficult to obtain, and I think
that is fairly close. I wouldn't call it a consensus, but I
would say the bulk of economists follow that line of reasoning,
including specifically the Federal Trade Commission and also
the CBO.
Mr. Lynch. I appreciate that, but I think we did hear
testimony here today, and in my bill specifically it is not
requiring public dissemination of proprietary interests here.
We are talking about you need to tell the Office of the
Inspector General for OPM. They already receive proprietary
information. They guard that jealously. In fact, if that
information got out, it would hurt their credibility enormously
and effect negatively their ability to do their job. So that is
why we are suggesting it just be limited disclosure.
Let me go on, though. Mr. Adcock, I know that you mentioned
earlier the number of NARFE employees that are included under
the FEHBP program. Let me ask you, what is the general
assessment in terms of your own members' attitudes toward the
current FEHBP program, specifically toward OPM's oversight of
prescription drug programs within the FEHBP?
Mr. Adcock. Well, I think it is kind of a love/hate
relationship. On one hand, I think that they are happy that
they have health insurance that is equivalent to what other
large employers provide, but I think they hate the fact that
they are paying premiums in the double digits for the last
several years.
With regard to prescription drugs, I mean, I think they
understand very clearly that is one of the huge cost drivers in
the program and is responsible for huge premium increases. Now,
I think that over the years, because of the fact that several
years ago they were encouraged through cost sharing to start
using mail order prescription drugs and thereby pharmaceutical
benefit managers, they are now accustomed to doing that.
I think that where there are concerns that we hear most
often is that when we hear examples that individuals that don't
have any insurance at all can go into a drug store and get a
better price on a specific type of drug than they can through
the insurance, that is troublesome to them. When they hear
about that State Attorney Generals all over the country are
involved with legal action against pharmaceutical benefits,
that is troublesome.
So, on one hand, I think that when you are talking about
customer service that they have with pharmaceutical benefit
managers and arranging for their drugs to be purchased, I think
a lot of these PBMs have very good customer service, but when
they hear about these stories they want to know what is going
on behind the curtain. That is why I think for a lot of them
they are very interested in the subject matter of this
legislation and transparency.
Mr. Lynch. Dr. Simon, could I ask you the same question? I
know the American Federation of Government Employees has a
tremendous amount of employees affected, as well. What are the
attitudes? I don't know if you are close to that level of
feedback.
Ms. Simon. I am, but I just want to say, especially in
light of the oath that we took at the beginning of the panel
here, I never finished my dissertation so I am not Dr. Simon.
Mr. Lynch. OK.
Ms. Simon. But in any case----
Mr. Lynch. All right. We won't hold that against you.
Ms. Simon. But thank you for the presumption.
In fact, AFGE is holding its annual legislative conference
this week, and during the issues briefing this weekend I don't
think there was any subject that raised peoples' hackles more
than what has been going on in FEHBP.
Mr. Lynch. Wow.
Ms. Simon. Part of that is because of the national health
care reform bills that would impose a so-called Cadillac Tax on
their FEHBP plans, and I think today's hearing shows that there
is nothing about the benefits that make it a Cadillac. It is
the fact that we pay too much. The price is too high, but the
benefits aren't necessarily luxurious or comprehensive. And so,
if that goes forward, they would get hit again for something
that is completely beyond their control.
We often, when we testify on FEHBP, note the fact that we
don't know the number exactly, but there are at least a couple
hundred thousand, if not more, Federal employees who are
eligible to participate in FEHBP but don't participate and
don't have insurance from another source because they can't
afford the premiums that are on average now 30 percent for the
enrollee, and they keep going up.
And so, many of our members work in veterans' hospitals or
in prisons and DOD medical facilities where they may be
providing these prescription drugs to inmates or patients,
veterans, or patients in the DOD hospitals, and they know that
the same Government that is paying for their health insurance
through FEHBP is paying one price if they were prescribed that
drug and a completely different price when they are dispensing
it in a VA hospital or a prison or through the Indian Health
Service.
They are very, very aware of the fact that FEHBP has not
been run in a way that would minimize the cost to taxpayers or
enrollees. And as it gets more and more expensive, and each
year a higher and higher percentage of overall premiums is
shifted onto the employees, they are livid. They are livid.
They are getting a small pay increase and their FEHBP premiums
are going up, up, up, and they like this legislation.
Mr. Lynch. OK. Thank you.
President Kelley, I know you have a pile of employees that
are also affected all over the place, right?
Ms. Kelley. We do. We do, Chairman Lynch. But it does come
down to the single issue of the cost of the plan, because
everything points to the fact that these annual increases are
so directly tied to the cost of prescriptions.
I would also say that the forum that you held last
September, on this issue, for those who did not know about the
Federal supply schedule and the prices that were being paid so
differently at DOD and VA, they know that now and they have
more questions about why that would be allowed to continue to
happen and why OPM--the question has always been what OPM will
do to better leverage the 8 million enrollees. Of course, like
I said, it always comes back to the prescription drugs as the
one element that is always pointed to when the annual prices,
the annual increases are announced each year.
Mr. Lynch. Let me ask you about that, then. We had this
forum. I guess I had an inclination to try to do the simplest
thing, which we have a Government purchasing system under the
FSS, that Federal supply schedule, and it is well known. It is
well used. It is established. It is used in general Government
purchasing. And it is fairly transparent. You put out there
what you are going to charge the Government for providing a
certain material or service. And it is competitive.
My thought was, rather than this very, very Rube Goldberg-
type construction that we have for Federal employees health
benefits on the pharmacy side, let's just put it out there like
we would for widgets, and you offer your price to the
Government and we accept it or reject it. We can consider
quality and level of service. Let's just do that. The PBMs were
the loudest critics of that system because it would eliminate
them from the whole process, basically.
Now, that is a very crude solution to our problem. It
simplifies things, but I will take for granted that widgets are
not the same as pharmaceuticals being recommended by a
physician for the health care of that individual. There are
some important differences there.
However, when you look at the VA system that is out there
that works pretty well, they have a fixed formulary, however,
so there is a more limited choice, although there are waivers
under certain circumstances.
How would your members respond to that if there was a fixed
formulary, because that is going to reduce, conceivably, it is
going to reduce some level of choice for some of these exotics
or some of these less commonly used pharmaceuticals? It is
going to be a limitation on choice. How are they going to
balance the likes and dislikes of a system that might have a
fixed formulary but a much lower price across the board?
Ms. Kelley. I don't know how they will react to change in
general, but any kind of a positive change I think would be
received. But one of the things that NTEU has recommended is
that this be done as a pilot, that it not just be an across-
the-board, because then all of the benefits that we already
know exist, such as the transparency, for those who oppose it,
it is already there. The obstacles that they are raising have
already been overcome with the use of the FSS.
Mr. Lynch. Yes.
Ms. Kelley. So let's try it in a pilot and one or two of
the plans in the program and see exactly what kind of an impact
it would have and if there are other issues that are created
that haven't been thought about.
Mr. Lynch. Like I said, there are waivers or there are
ways, if something is not on the formulary, if you make a
showing that this is needed then there is a way to get around
that, but it does put sort of a gatekeeper on the formulary.
Mr. McNeely, you had some great testimony earlier on about
competitiveness and transparency. Are there items, as you look
from U.S. PIRG's standpoint, that should be added to this
legislation that we may have forgotten or that you might think
would be helpful?
Mr. McNeely. Yes, and we would be happy to work with you,
but we generally believe that there are some steps that are to
be taken to strengthen the consumer protections within FEHBP by
establishing an ombudsman and some other measures which I would
be happy to work with the committee in terms of those
suggestions.
Mr. Lynch. Yes. An ombudsman in what respect? With appeals
to which body, the carrier, the pharmacy, the PBM? That is OK.
I am getting a little deep in the weeds here and I don't want
to put you on the spot.
Mr. McNeely. OK. Thank you.
Mr. Lynch. Are there any other matters that we have
overlooked here in terms of trying to--as I said at the outset,
this legislation is not etched in stone, and we have heard from
all three panels I think constructive recommendations that we
could improve our bill, and we are happy to do that. But are
there other items? How about the suggestion that was made by
Representative Treat from Maine about importing a standard of
fiduciary responsibility on the part of the PBM to act as
fiduciary on behalf of the plan, of the insured, the
participants? Any thoughts on that?
Mr. Adcock. Imposing a fiduciary duty on the insurance
carrier or on the PBM?
Mr. Lynch. PBM.
Mr. Adcock. On the PBM. I guess I don't know enough about
what kind of responsibilities that would involve and what the
checks would be in terms of the oversight on the employer to
ensure that they were actually complying with those fiduciary
duties. I mean, obviously, as an employer you are a fiduciary
or should be, at least, a fiduciary of your health plan on
behalf of your employees and retirees, but I am not sure
exactly how that would work with a PBM.
Mr. Lynch. I think what they are trying to get at is this:
you are hiring a pharmacy benefit manager to get you the best
deal. That PBM goes out there, negotiates a deal for you as
your agent, but, unbeknownst to you because of the way the
system works right now, they pocket part of the advantage that
you paid them. You have already paid them as your agent to go
out there and get a good deal. Then they get you a good deal, a
great deal maybe, but then they pocket part of the advantage
and come back to you and give you some measure less than what
you paid them to get you.
And so, that sort of gives a little bit of a snapshot on
the problem here, that these deals are all going on and you
never know the real cost. As Mr. Weiner testified, you never
know what that bottom-line cost was, but with a fiduciary
responsibility it would make it clearer that the benefits flow
to you, that PBM is out there negotiating for your benefit as
your agent, and it would require full disclosure of any
advantageous relationship that they engaged in that may be in
contravention of your own interest.
Mr. Adcock. I guess my question would be is if there is
such a fiduciary duty what sanctions would be made against the
PBM if they breached that duty.
Mr. Lynch. Well, there is a great deal of case law that has
been developed around the responsibility of fiduciary
responsibility, and I think that would all be imported. Those
standards would be applied if we import the fiduciary
relationship with respect to a PBM and the people that you
represent.
I just want to ask you each if you have anything that you
would like to add. We have a series of roll calls. I would
rather be able to dismiss the panel and adjourn the hearing
than come back. I think we are probably at that point anyway.
You have suffered enough.
Ms. Simon.
Ms. Simon. I just would say very quickly I think that this
idea of imposing fiduciary responsibility on the PBM makes it
even more important that we would have the cost and pricing
data that would be triggered by application of TINA, the Truth
in Negotiations Act. We would find out what prices they were
charging to all their customers and what the actual cost of
production of these drugs is, in many cases when you are buying
drugs it is a sole source contract, and that is what triggers
the applicability of TINA, where you find out this data--again,
proprietary data that would be held by the agency, so it
wouldn't be made public, but it would allow the Government to
enforce this fiduciary standard on the PBM. So either way we
need this data. We need this information.
Mr. Lynch. OK. Great. President Kelley.
Ms. Kelley. I will be looking more at the Maine experience
and at that language, but it just seems to me that language on
fiduciary responsibility would add to the transparency, which
is the goal of the legislation, and that would be an
enhancement to it.
Mr. Lynch. Yes. That is my reading, as well.
Mr. Calfee, please?
Mr. Calfee. Yes. I would suggest that the most dangerous
and counterproductive part of this legislation is the pass-
through. If you say to a PBM we want you to go out and
negotiate a really good discount, negotiating discounts is not
a straightforward thing. If anyone can walk into a pharma firm
and say give me a 25 percent discount and they would give it to
them, everyone would get the discount. It is a tricky business.
If you say to the PBM, We want you to go out there and do
all this work and negotiating a discount and figure out these
clever things, working with formularies and so on, and then
give all the returns to us, you are not going to get any
discounts.
What it really does is it puts the onus on the plan to
negotiate the discount. If they can do that, fine. Sometimes
they can. But sometimes they can't.
Mr. Lynch. OK. Mr. McNeely.
Mr. McNeely. Yes. I just wanted to weigh in on the
fiduciary responsibility piece.
We would have to take another look at the Maine
legislation, but I think we are generally inclined to support
that direction if that is the direction the committee moves
with.
Mr. Lynch. Great. Thank you.
As you notice, we have several hearings going on at one
time, and I am going to leave the record open in case any of
the Members have any questions for members of the panel.
I do want to thank you very, very much for your willingness
to come before the committee and help us with our work. This is
tough stuff, very complicated, but I think you are each in a
position that has a unique perspective, and it is very helpful
to us in trying to figure out what the intended and unintended
consequences might be.
I want to thank you for your testimony here. You are free
to go. This hearing is now adjourned.
[Whereupon, at 4:33 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Edolphus Towns and
additional information submitted for the hearing record
follow:]
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